Hive up or hive down

There are many reasons why you may want to move assets and or liabilities around a group of companies or create a group so that you can make the move of assets and or liabilities.  Typical reasons include:

• As part of a re-organisation required pre-investment or pre-sale. For example a potential purchaser may want to buy one business stream but not the other parts of the business.
• Different assets may be needed in different parts of the group.
• Ring fencing assets from risk in the event of insolvency – there are time constraints to consider in this scenario.

The skill is to find a way that does not generate tax liabilities for the company or its shareholders.  This is an area of our expertise.  We explain below what you need to be thinking about.

What is hiving up and hiving down?

The basic position is that:

• A hive up is a reorganisation within a group of companies whereby the assets and business of a subsidiary are transferred up into the parent company.
• A hive down is the transfer of all or part of the assets or business of a company to a subsidiary – usually a new subsidiary.

Unless you already have a group of companies the first job is to put a new parent or subsidiary company before the hive up or hive down can proceed. Key points are :

• Putting a new subsidiary in place is very straightforward and can be completed quickly without any tax implications.
• Putting a new parent company is more complicated and involves a share-for-share exchange.

Practical Steps to achieve a hive up or hive down

Where parts of the business have been acquired from third parties, the first step is to ensure that that the original agreements for the acquisition of the relevant business or trade permit the hive up or hive down to transfer the trade. It is important to check that:

• no breach of warranties/indemnities will occur; and
• no option to repurchase will be triggered by transferring that business.

Provided there are no such risks the parties can then move forward to the corporate steps to achieve a hive up or hive down.

A hive up may involve a dividend in specie which will require that the company has sufficient distributable reserves. This will again require a valuation – an interesting feature is that the value can be determined by the directors.

The practical steps to achieve a hive up or hive down are largely the same as for the transfer of assets to a third party. This means that the ownership of assets must be transferred. In some cases the transfer is only of the beneficial interest, in others it will be a transfer of both the legal and beneficial interest.  There will need to be an agreement to transfer the trade, assets and undertaking.  In particular the company will need to consider:

• Land - If the company is transferring land and buildings, it will be necessary to confirm that a transfer of a leasehold property would not result in the breaking of any covenants in the lease; and the lease should be reviewed to see whether the consent of the landlord is required. Conveyances and assignments will normally be required regarding freehold and leasehold properties and see the comments above regarding SDLT.
• Intellectual Property - Trademarks, copyrights and registered designs, patents, and certain licenses may have to be transferred.
• Employees - Agreements with employees may have to be transferred and the provisions of the relevant employment legislation complied with. In particular, the Transfer of Undertakings (Protection of Employment) Regulations 2006 should be considered.  It should be ensured that any transfers do not result in an immediate liability to make redundancy payments.  The position of pensions requires consideration, and any transfer of pension funds and rights will need HMRC approval. If employees have any share options it should be confirmed that these are held in the correct entity and if EMI options are to be rolled up in a hive up the consent of HMRC will again be required.
• Contracts - Customers and suppliers will have to be notified of the change of counterparty to their contracts. If there are any particularly important customers and suppliers their contracts should be checked to ensure there are no change of control clauses that would allow an early termination. 
• Banks - the signees on the bank accounts may change. Credit facilities will need to be confirmed. Where the hived up or hived down recipient business has no credit record, then it should be noted that initially credit may not be given (while the credit history of such company develops).
• Other third parties - Third parties such as insurance providers and HMRC’s offices dealing with the company’s VAT, PAYE and National Insurance will need to be advised of the transfers. Authorities and organisations dealing with rates, council tax, and utilities will have to be advised.

Tax Considerations 

In many cases it is possible to obtain a pre-transaction view from HMRC as to whether the hive up or hive down is likely to be regarded as tax avoidance. This is very helpful for our clients and over the years we have secured many successful tax clearances.

There are certain taxes to consider on a share-for-share exchange .  However provided the share-for-share exchange is for bona fide commercial reasons then no disposal should arise for capital gains tax purposes. Also, normally stamp duty is payable at a rate of 0.5% on any transfer of shares. However, provided that there is a mirror image of:

• the proportions of the shareholdings of the original company; and
• the proportions in which they are owned in the parent company;

it should be possible to claim relief from stamp duty.

Depending upon the facts there can be tax traps if you are not careful. For example, the VAT position will need to be checked to see whether the transfer will fall within the conditions for a transfer of a business as a going concern. Where this does not apply, the sale of the assets will potentially be subject to VAT. The transfer will not give rise to a VAT charge if:

• The hive down company is a member of the seller’s VAT group
• The transfer qualifies as a transfer as a going concern

There are complex rules around the carrying forward of any trading losses which should be considered carefully. If a property is among the assets being transferred, the rules around SDLT (Stamp Duty Land Tax) should also be reviewed as relief is likely available, but may be clawed back on a further transfer within three years.

There can be a corporation tax charge under a regime known as “degrouping charges” where the subsidiary is sold off shortly after the hive down – discussed below. Valuations may need to be prepared to ensure that assets are transferred at the correct value for any tax that may arise.

Selling a company that has been hived down 

A hive down is typically seen prior to a sale of the shares of the hive down company to a third party.  The Substantial Shareholding Exemption (SSE) generally provides that a gain on the disposal by a company of shares will not be a chargeable gain provided the certain conditions are satisfied.

Again, normally stamp duty is payable at a rate of 0.5% on any transfer of shares to a third party.