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AIA

PTP's Tax Tip No.34 ' Demergers

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17th Oct 2005
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Q. My client and his brother own a property investment company 50:50. They no longer get on very well and to stop the business suffering they want to split the company up because they have differing ideas about where the business is going. As luck would have it the company's holdings are half commercial, half residential and each portfolio is of equal value. I was talking to a professional colleague the other day who said he did a liquidation demerger ( i.e. not a statutory demerger within s.213 ICTA 1988) in very similar circumstances last year (so that each brother would end up with one company), and that following the usual Revenue clearances the only tax cost was SDLT at 0.5%. Should I proceed?

A. Be careful. Whilst it is true that a liquidation demerger transferring each portfolio to a single-brother Newco in exchange for an issue of shares would achieve your clients' commercial objective and is likely to be tax neutral subject to Revenue clearances, the SDLT analysis has changed. Acquisition relief under para.8 sch.7 FA 2003 has been amended by FA (No.2) 2005 with effect from 19 May 2005 and is no longer available unless the acquired undertaking is wholly or mainly a trade (sub-para.5A) ' and property investment in not a trading activity. There seems to be no commercial or policy justification for the change ' it's just a penal money-raising measure aimed at the property investment market that means that your clients would have to pay as much as eight times more SDLT than you were anticipating! Your colleague's clients were lucky to act when they did.

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