A demerger checklist for accountants

When a client says they want to "split the company", the accountant is usually the first to hear it. The early questions you ask, and the information you gather, can make the difference between a smooth, tax-neutral demerger and an expensive repair job.

This checklist is for accountants advising owner-managed companies and groups. It covers what to gather, the red flags to look for, and when it makes sense to bring in a specialist.

Step 1: understand the aim

Before looking at structure, pin down what the client is trying to achieve. Typical aims:

• separating property from the risks of a trade
• letting two businesses run independently
• shareholders going separate ways
• passing different businesses to different family members
• preparing a business for sale or investment without the other

Then ask the two questions that shape everything:

1. Who should own what afterwards? Same shareholders in the same proportions, or different?
2. What happens next? Any sale, investment, succession, emigration or wind-down expected in the next three to five years?

Step 2: gather the information

Corporate

• Group structure chart, with shareholdings at each level
• Articles and share rights for each class
• Shareholders' agreement and any options or EMI schemes
• Share register, with any changes in the last few years
• Previous reorganisations and any HMRC clearances obtained

Financial

• Latest statutory accounts for each company
• Current management accounts
• Distributable reserves for the relevant companies
• Intercompany balances and directors' loan accounts
• Cash and investments not needed for the trade
• Bank loans, security and cross-guarantees

Property

• Each property, its location (England, Wales, Scotland, Northern Ireland) and use
• Current market value and base cost
• Mortgages and charges
• Leases to group companies or third parties
• Any property moved between group companies in the last six years, with dates

People and contracts

• Shareholders' residence status, now and expected
• Each shareholder's role in each business
• Employees in each business
• Key contracts, licences and leases with change-of-control or assignment clauses
• VAT registrations and group arrangements

Step 3: look for red flags

Each of these can change the route or add a tax cost if it isn't designed around.

Questions to put to the client in the first meeting

The documents tell you the structure. The client's answers tell you the risks. Useful questions include:

1. "If we did nothing, what would go wrong?" This brings out the real commercial reason, which HMRC will want to understand.
2. "Has anyone approached you about buying or investing in either business?" Even informal approaches matter.
3. "Who works in which business, and who will run each one afterwards?"
4. "Are any shareholders thinking of moving abroad, retiring or passing shares to family?"
5. "Has property or anything else of value moved between the companies in the last few years?"
6. "Will anyone need cash out of this, or is it purely a reorganisation?"
7. "Does the bank know, and is there security over the property?"
8. "Has any previous restructuring been done, and was HMRC clearance obtained?"

Write down the answers. They will feed directly into the clearance application, and differences between what the client says now and what happens later are a common source of problems.

Common client misunderstandings

Expect to hear some of these, and to correct them gently:

• "We'll just transfer the property to ourselves." A transfer out of the company to shareholders is usually a distribution, taxed as income, and a disposal by the company. A demerger is designed to avoid exactly that.
• "It's the same people, so there's no tax." Common ownership helps, but the reliefs still have conditions, and SDLT generally applies at market value between connected companies unless a relief applies.
• "HMRC clearance is a formality." It is not compulsory, but it is a real review, and questions are common.
• "We can sell the property company next year." Possibly, but SDLT relief can be withdrawn on a change of control within three years.
• "A demerger will save us inheritance tax." It can do the opposite if property ends up in an investment company outside Business Relief.

Step 4: decide when to bring in a specialist

A demerger combines several taxes, company law and HMRC procedure. It is worth bringing in a specialist when:

• the client has a clear aim and the red flags above apply
• there is a sale or investment anywhere in the picture
• property is involved, especially of significant value
• shareholders want different outcomes
• clearance will be needed, which is most of the time

The earlier, the better. Ideally before the client settles on a route, and certainly before any property moves or share classes change.

Where the accountant's input is most valuable

Three areas depend heavily on the accountant, and are worth starting early:

• Reserves and accounting entries. Capital reduction demergers turn on the reserves position and the book values used for the distribution. Getting the numbers agreed before the legal documents are drafted avoids late changes.
• Solvency support. Directors giving a solvency statement or a declaration of solvency need reliable figures, including cash flow forecasts for the following twelve months. The accountant is usually best placed to prepare these.
• Valuations. Partitions in particular depend on agreed values for each business, so that each shareholder group receives the right share. Clear, well-supported valuations also help if HMRC asks questions.

Who usually does what

Step 5: the post-completion diary

After implementation, diary:

• 30-day return after an exempt distribution (statutory demergers)
• Stamp duty adjudication of share transfers
• SDLT returns (14 days) and the three-year withdrawal window
• Five years for chargeable payments after a statutory demerger
• Six years for degrouping exposure on earlier intra-group transfers
• Two-year BADR position for any planned sale

How we work with accountants

We advise only on demergers and the reorganisations around them, and we don't offer accounts, audit or legal work, so we never compete with you for the client. The client stays yours. We take the route design, the HMRC clearance and the tax side of implementation, and work alongside you and the client's solicitor. We respond the same working day. See for introducers and how we work, or try the demerger route finder for a first view.

This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.