Demerging property from a construction group before a sale

Yes. A demerger can move property into a separate company owned by the same shareholders, leaving the trading company ready to sell. With the right reliefs and HMRC clearances in place, this can often be done without capital gains tax, corporation tax or stamp duty land tax on the reorganisation itself, although each relief has conditions that must be met.

Many buyers want the trading business but not the property it uses. Buying the property ties up capital in an asset outside their core business, and their funders may value it differently. For the owners, keeping the property can provide a long-term income, for example as rent from the trading business after the sale.

A capital reduction demerger uses a reduction of a company's share capital under the Companies Act 2006 to transfer a business or assets, such as property, to a new company owned by the shareholders. It's often used where the property is an investment rather than a trade. It usually follows the insertion of a new holding company and needs carefully ordered legal and tax steps.

A new holding company is often needed to make the later demerger steps work, because the capital reduction is made by a company at the top of the group. It's usually inserted through a share-for-share exchange, where shareholders swap their shares for shares in the new company. Where the conditions are met, that exchange can be done without a capital gains tax charge.

A statutory demerger under the Corporation Tax Act 2010 needs the businesses being separated to be trading, and can't be part of arrangements for outsiders to take control afterwards. Holding property is usually an investment activity, and here a sale was planned. A capital reduction demerger, or a liquidation demerger, is usually used in that situation instead.

It's another way to separate property from a trade. A liquidation demerger uses section 110 of the Insolvency Act 1986: a company is wound up and its businesses or assets pass to new companies owned by the shareholders. It involves a liquidator and more formal steps, so a capital reduction route is often preferred where it works on the facts.

Section 138 TCGA 1992 clearance confirms that HMRC won't use its anti-avoidance rule to deny the capital gains treatment of a share exchange or reconstruction. Section 701 ITA 2007 clearance confirms the transactions in securities rules won't be used to tax shareholders on income. Both are commonly sought before a demerger like this.

Because it gives certainty before any irreversible step. If HMRC has questions or concerns, they can be answered, or the plan changed, while it's still a plan. Implementing first and asking later risks a completed reorganisation that doesn't qualify for relief, which is much harder to put right. That was the approach here.

HMRC must normally respond to the main statutory clearances within 30 days of a complete application. If it asks for more information, the 30 days run from when that information is provided, so the overall time can be longer. That's why clearance needs to be built into the timetable early.

It can be, because moving property between companies is normally a land transaction. Reliefs in Schedule 7 to the Finance Act 2003, such as reconstruction and acquisition relief, can apply to some reorganisations. Their conditions need to be met carefully, and the relief can be withdrawn if control of the acquiring company changes within three years.

Yes. A clearance application should set out the full picture, including any planned sale. A sale after a reorganisation can affect some reliefs, so the order and timing of the steps matter. Getting advice before a buyer is involved gives the most options. In this case, the clearance applications reflected the planned sale.

Removing investment property can help a company count as trading, which the relief requires. But the conditions must generally be met throughout the two years before the sale, so the timing of the demerger and the sale both matter. Each shareholder's position, including their shareholding and role, should be checked separately.

It stays with the shareholders. It can continue to own the property and, if the parties agree, lease it to the trading business under its new owner. The property company's own tax position, such as corporation tax on rent and any future sale, then needs looking after separately from the trade.

Often, yes. The same principles apply to smaller groups, but the professional costs of clearances, legal steps and accounts work need to make sense against the benefit. For a single property in a modest company, we'll tell you honestly whether a demerger is worthwhile or whether another approach suits better.

Planning the order of the steps and getting HMRC clearance before implementation. The holding company insertion, the capital reduction demerger and the property transfers each depended on the one before. The order of the steps matters, which is where we come in. Each step was checked against the plan before it was taken, and nothing was implemented until HMRC had given clearance.