That’s a fine mess we can get you out of!

How many business advisers have encountered a company or a group that has enjoyed numerous years of profit with the cash from such profits used to build a property portfolio in the group or, alternatively, to diversify into new trading areas within the group which creates a lack of direction for the management team – sound familiar?

Our experience of the owners of such groups, has highlighted their common goal to position the business for sale facilitating their retirement or their aim to move onto new commercial challenges or to allow new investment into the business.

However, it is common for the expanded group activities to be identified as obstructions to sale planning. For a potential buyer, there may be trading or investment parts of the business that makes the acquisition unattractive and for the seller, the investment part of the business makes the 28% tax rate on sale of shares unpleasant.

The solution is normally a pre-sale reorganisation of the group to allow:

• Independent trading activities to be split into separate trading units where management have a renewed focus on key performance drivers; and
• Investment activities to be separated from the group leaving it with solely trading activities.

Until recently, the choice to achieve such business splitting was a statutory or nonstatutory demerger, both of which were costly and lacked appeal for most business owners. However, a change in law allows a business to be broken up through a simplified process of Capital Reduction, as the need for court approval to the reduction has been removed.

Capital Reductions can be used to return to shareholders excess amounts of value locked in share capital by way of cash or asset transfers tax efficiently.

Additionally, they are now being favoured over the demerger route to achieve the extraction of non-core trading activities or investment assets from the group with little or no tax effect for the shareholders.

Furthermore, utilising a Capital Reduction to extract parts of an existing group achieves the following advantages:

• The stigma and cost of a liquidation demerger are avoided;
• The Capital Reduction involves only one part of a business exiting the group which allows the tax adviser more flexibility in planning the relevant transactions needed to achieve the business goals with reduced exposure to tax on exit;
• Stamp Duty costs are likely to be less.

Where plans to split core trading activities from other assets have been achieved, our clients have been delighted with the outcome given the result is management with more focus on the segregated parts of the business and the business owners having access to a 10% rate of tax on the sale of their shares in the group.

However, a word of caution. To achieve the extraction of business assets with minimal tax impact, advantage has to be taken of a number of tax reliefs. As a result, we recommend specialist tax and accounting advice be taken where such a transaction is being contemplated.

For more information contact Derek Gemmell, Partner, Derek.gemmell@aab.co.uk