Capital reduction demerger and share transaction

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Gannons recently completed a capital reduction demerger and share transaction.

Our client was the sole shareholder of a company running a car trading business which also owned certain real properties. Our work involved overseeing a share for share exchange to allow our client to facilitate an investment opportunity.

Purpose of the demerger

Our client conducted discussions with an investor interested in investing in the car trading business. However, he wanted to do so without investing in the property assets. Our solution was to demerge the company, separating the property assets from the car trading business in a tax efficient way.

Tax neutral re-structure and share for share exchange share transaction

We carefully structured the capital reduction demerger tax neutrally. A new parent company was formed. Our client then transferred his share in the original company in exchange for shares in the new parent company. The share for share exchange share transaction is tax neutral (incurring no Capital Gains Tax or Stamp Duty).

Forming a subsidiary

A new wholly owned subsidiary was formed, and the car business assets were transferred into it. An intra-group asset transfer is tax neutral (it incurs no Capital Gains Tax).

Transferring the subsidiary

The new parent company then transferred the new subsidiary (the car business) to a new holding company, with a capital reduction in the parent company. The capital reduction reflected the market value of the assets transferred. Hence it represented a return of capital, as opposed to income distribution. Therefore, the shareholders did not incur income tax on the transaction.

Position after the demerger

Two companies emerged from the demerger, carrying out the activities of the original company. Each had a holding company above it, both owned by our client. The investor could then acquire shares in the new subsidiary solely running the car trading business.

Considering capital reduction demergers

Capital reduction demergers and share for share for share exchange share transactions can be useful in a variety of situations for creating or releasing shareholder value. Either as a direct demerger to shareholders or indirect, with the demerged activities being distributed to new holding companies. This type of demerger uses the demerged assets as the consideration for the reduction of capital by the new parent company.

When considering capital reduction demergers, we prepare a viability study and roadmap for your business and can apply for HMRC to give advance clearance on the tax neutrality.

Our Corporate Team is highly experienced at completing transactions such as capital reduction demergers and share transactions. Please do give us a call on 020 7438 1060 if you have any questions or are looking for help with a transaction.

  • The team at Gannons understood our objectives and put forward a well thought through re-structure.