How We Saved a Family Over £800k: Demerging a £3m London Property Into a Family Investment Company

How We Saved a Family Over £800k: Demerging a £3m London Property Into a Family Investment Company

At a glance

The family and the business

The business is a family travel agency in London, trading successfully since 1980. Decades ago, the company bought the building it trades from for around £200,000. Today that building is worth around £3m.

The company is owned by three siblings: 70%, 20% and 10%. The eldest sister holds the largest share and manages the family's affairs for everyone.

What the family wanted

Three things mattered:

• Succession. The building is a key part of the family's wealth from one generation to the next. They wanted it held for the family over the long term, including the siblings' children.
• Flexibility on the business. The family may sell the trading business in future. Keeping the property inside the trading company would complicate that sale and expose the building to trading risk.
• Fairness. With three siblings holding different stakes and the next generation coming through, the structure had to be fair to everyone and clear about who decides what.

The problem with the obvious routes

Taking the building out of the company the ordinary way would have been expensive:

• Corporation tax on the gain. Moving a building worth around £3m that cost around £200,000 would create a gain of around £2.8m in the company. At 25%, that is around £700,000 of corporation tax.
• SDLT. A transfer of the property to another company would ordinarily trigger stamp duty land tax on its market value, adding a further six-figure cost.
• Tax on the family. Getting the property or its value out to the siblings personally would bring further tax on top.

Together, the corporation tax on the gain and the SDLT came to well over £800,000, before any personal tax.

What we did

We recommended a capital reduction demerger, followed by setting up the demerged company as a Family Investment Company.

1. The demerger. The building was separated from the trading company into a new company owned by the family, in the same proportions as the trading company. A capital reduction demerger is a reconstruction for tax purposes, so with the right reliefs and HMRC clearance in place:

• there was no capital gains tax for the siblings;
• there was no corporation tax on the gain in the company;
• and, just as importantly, no SDLT on the demerger. Being able to move property between companies without an SDLT bill is one of the greatest benefits of a capital reduction demerger.

2. The base cost. This is the part other advisers had missed. We structured the steps so that the property's base cost in the new company reflects its current value of around £3m, rather than the original £200,000. If the family sold the building tomorrow, there would be no capital gains to pay on the growth to date. The anti-avoidance rules had to be addressed carefully, and they were dealt with in the HMRC clearance application before any step was taken.

3. The Family Investment Company. The demerged company became the family's Family Investment Company. The share structure brings in the three siblings and their children. The eldest sister holds the voting control, so decisions stay with the person already managing the family's affairs, while value and growth are shared across the family.

4. HMRC clearance and legal work. We applied for HMRC clearance before anything was implemented, and our in-house legal team prepared and executed all the documents and Companies House filings.

The result

• The building now sits in the family's own company, separate from the trading business and its risks.
• The trading business carries on exactly as before, and is cleaner to sell if the family decides to.
• No capital gains tax, no corporation tax on the gain and no SDLT on the demerger: a saving of over £800,000.
• The property's base cost reflects its current value of around £3m.
• The next generation is involved, with control clearly held and the structure fair to all three branches of the family.

Timescale

The family first spoke to us eight months before instructing us. In that time they sorted out a number of practical points, including their mortgage position and a refinance.

From instruction to completion took three months, including the HMRC clearances and all the legal implementation.

What happens next

The work continues:

• Further properties. The family owns other properties, which are being transferred directly into the Family Investment Company. Some have only a small gain, so the SDLT cost on those transfers is manageable.
• Inheritance tax. A family trust has been set up to move value out of the siblings' estates over time. We are working through that stage now.

Could this work for you?

If your trading company owns its building, or other property, and you are thinking about succession, a future sale or protecting the property from trading risk, a capital reduction demerger is worth exploring. The details matter: the order of the steps, the reliefs, the anti-avoidance rules and the HMRC clearance all need to be right.

Book a free 20-minute call and we will tell you whether it could work for your family.

Figures are rounded. This case study describes one family's circumstances. Every case depends on its own facts and on the law at the time, and nothing here is a guarantee of a tax outcome.