Capital Reduction Demerger: Separating a £1.3m Property Ahead of a Sale

Capital Reduction Demerger: Separating a £1.3m Property Ahead of a Sale

Four shareholders had agreed heads of terms to sell their manufacturing business, but not its premises. The premises were worth £1.3m, and the buyer was keen to move quickly. This is how our team took the property out of the company without a tax charge and without derailing the sale.

At a glance

• Client: four shareholders of a manufacturing business, with heads of terms agreed for a sale
• The asset: the company's premises, valued at £1.3m, to be kept out of the sale
• Route: a capital reduction demerger, chosen after we compared it with two other methods
• Timing: we were instructed at the eleventh hour, and the buyer wanted to complete in around a month
• HMRC: clearance granted within 2.5 weeks
• Result: the property now sits in a company owned by the shareholders, with no tax charge on the separation

The client

The client was a group of four shareholders in a manufacturing business. They had agreed heads of terms to sell the business, but without its premises. Their first idea was straightforward: buy the property from the company themselves.

They needed the property taken out tax-efficiently, and they needed it done without putting the sale at risk.

The challenge

There was a tax problem and a timing problem.

• Tax. There was more than one way to get the property out of the company. A sale to the shareholders, a dividend in specie (a distribution of the asset itself) and a capital reduction demerger each have different tax consequences. The shareholders needed to see the cost of each before choosing.
• Timing. We came in late. The buyer wanted to complete in around a month. With clearance, an advice report and the solicitors' work still to do, a demerger would take a couple of months at best.
• The buyer's review. The buyer's advisers would need to be comfortable with the reorganisation. If they reviewed it only after it was finished, any issues they raised could hold up completion.

What we did

• Compared the three routes. We prepared workings for a sale to the shareholders, a dividend in specie and a capital reduction demerger, so the shareholders could see their position under each. The demerger was the most involved route, but potentially the only one that took the property out tax-free in this situation. Once the numbers were run, it was clearly the right method.
• Prepared the documents that drive a demerger. These were the steps plan, the advance clearance application to HMRC and an advice report setting out the tax consequences of each step.
• Put the clearance application in first. HMRC's response time drove the whole timetable. The solicitors drafted the share exchange, solvency statement and capital reduction documents in parallel while we waited, so nobody sat waiting for someone else.
• Ran the whole job from one rolling agenda. The agenda was shared with the client, their solicitors and the wider deal team. Every action had an owner and a deadline, whether it belonged to us, the client, the solicitors or the buyer's advisers. The client and their own accountants supplied the balance sheet and reserves information. We owned the tax analysis, the clearance and the steps plan.
• Held weekly calls with every party. Each call worked through the outstanding actions, so any slippage was spotted straight away and either resolved or reallocated.
• Acted as the single point of contact. We coordinated between the client, the solicitors and the buyer's side, and explained the technical tax points in plain terms. The client never had to relay messages between advisers or chase anyone.
• Reset expectations early. We took the client and the buyer through the method, the realistic timetable and how it affected the sale, so the timing was agreed up front rather than missed later.
• Ran due diligence alongside the demerger. The buyer's advisers saw the clearance application and steps plan as each was produced, and their questions went straight onto the agenda. The two processes ran in parallel instead of one after the other.

The outcome

• HMRC granted clearance within 2.5 weeks.
• The property was separated into a company owned by the shareholders without a tax charge.
• Because the buyer had reviewed the reorganisation throughout, it raised no late issues that could have delayed completion.

Why it matters

Late instructions are common on a sale, and the cheapest-looking route is often not the one that works best on tax. Running the numbers on every route first is what showed the demerger was right here. Starting the clearance application straight away, and letting the buyer review each step as it was produced, is what kept a process that would normally take months close to the buyer's timetable.

To see how this works in practice, read our guide to the capital reduction demerger, or book a call with our team.