Separate a business or property using a reduction of share capital.

A capital reduction demerger separates a business or property by reducing a company's share capital and using that reduction to pass the business to a new company owned by the shareholders. Typically a new holding company is inserted first, then it reduces its capital and transfers one business to a second new company, which issues shares to the shareholders. It is widely used by private companies because it works for property and investment businesses as well as trades.

Because it is flexible and avoids a liquidation. A private company can reduce its capital using a directors' solvency statement instead of going to court, so the process is relatively quick. Unlike a statutory demerger, it is not limited to trading businesses, so it can separate investment property. And unlike a liquidation demerger, it does not need a liquidator or a winding up. Those advantages make it the default route for many owner-managed groups.

A new holding company is usually inserted through a share-for-share exchange so that the shareholders hold a fresh company with a large share capital, reflecting the value of the group. That share capital can then be reduced to support the demerger. It also means the existing trading company, with its contracts, history and liabilities, does not need to reduce its own capital. The exchange is normally tax neutral for the shareholders where the conditions of section 135 TCGA 1992 are met.

A solvency statement is a statement by each director that the company can pay its debts now and over the following year. Under section 641 to 644 of the Companies Act 2006, a private company can reduce its share capital by special resolution supported by a solvency statement, without applying to court. The statement must be made not more than 15 days before the resolution, and it is a criminal offence to make one without reasonable grounds.

A reduction supported by a solvency statement only takes effect when the documents are registered at Companies House. Within 15 days after the resolution, the company must deliver a copy of the solvency statement and a statement of capital to the registrar. Until they are registered, the reduction has not happened, so the distribution that relies on it must wait. That timing point is built into the step plan so the steps happen in the right order.

Yes. Under the Companies (Reduction of Share Capital) Order 2008, a reserve arising from a reduction supported by a solvency statement is treated as a realised profit. That gives the company distributable reserves to support the transfer of the demerged business. Your lawyers and accountants confirm the actual figures and the accounts used, but this is the company law reason the route works even where the group has limited retained profits.

Typically three areas of relief work together. Section 136 TCGA 1992 can treat the shareholders' new shares as replacing their old ones, so no capital gain arises. Section 139 TCGA 1992 can treat the company's transfer of the business as a no gain, no loss disposal. Stamp duty and SDLT reliefs may cover transfers of shares and land. Each relief has conditions and anti-avoidance rules, and HMRC clearance is normally obtained first.

It should not be, where it is structured properly. The definition of a distribution in section 1000 CTA 2010 excludes amounts that represent a repayment of capital on the shares, and a distribution made on a reduction of capital can fall within that exclusion. The transactions in securities rules can still apply if the arrangements give shareholders an income tax advantage, which is why a clearance under section 701 ITA 2007 is usually included in the application.

Usually clearance under section 138 TCGA 1992 for the share exchange and reconstruction, under section 139(5) for the transfer of the business, and under section 701 ITA 2007 for transactions in securities. Where a company is a shareholder, section 748 CTA 2010 may be relevant instead. These can be made in a single application to HMRC, which must respond within 30 days of a complete application. Stamp duty and SDLT reliefs are claimed separately.

Stamp duty at 0.5% can arise twice: on the share exchange that inserts the holding company, and on the transfer of the demerged company's shares to the new company. Relief under section 77 Finance Act 1986 may cover the first, and section 75 the second, but both require shareholdings to mirror. Section 77 is also denied if there are disqualifying arrangements under section 77A for someone to obtain control of the new holding company.

Section 77A Finance Act 1986 treats arrangements as disqualifying if it is reasonable to assume a purpose is for a person, or persons together, to obtain control of the acquiring company. A planned demerger can create exactly that risk. Since 22 July 2020, a person who has held at least 25% of the target throughout the previous three years is excluded from this test, which helps many family and owner-managed companies. Whether it applies depends on who will control what.

Only if land or buildings move between companies. Where the demerged business is a company holding the property, its shares move and SDLT is not charged on a share transfer. If property is first moved between group companies, SDLT group relief may be denied where there are arrangements for the purchaser to leave the group, and reliefs can be withdrawn within three years. The order in which property moves is therefore critical.

It can, and it is a common preparatory step, but it needs care. The transfer may create SDLT, a capital gains degrouping charge if the subsidiary later leaves the group within six years, and VAT questions for commercial property. Group reliefs often do not work if the demerger is already planned, because there are arrangements for the company to leave the group. We map this out before any property moves, as it often drives the choice of route.

Usually a few months from first call to completion, depending on how quickly information and valuations are available and whether HMRC asks questions on the clearance application. HMRC must reply within 30 days of a complete application. The company law steps themselves can be completed quickly once clearance is in hand, but the solvency statement, resolutions and registration have their own timing rules, so they are scheduled carefully in the step plan.

Yes. With a reorganisation of shares into classes first, a capital reduction can pass different businesses to different shareholders. This is called a partition. The capital gains tax reliefs can still apply if each class is treated equally, but stamp duty relief on the transfer to the new company is usually unavailable because shareholdings will not mirror. Partitions need extra planning, particularly on valuations and stamp duty.

The main risk is the solvency statement. Each director must be able to support the opinion that the company can pay its debts now and over the following year, and making a statement without reasonable grounds is a criminal offence. Directors should see up-to-date management accounts and cash flow forecasts and take legal advice. The tax adviser does not sign the statement, but the step plan should give directors the information they need.