Demerging property businesses and trading activities

Typically, successful companies have often reinvested their surplus net (of tax) profit into property. As the rate of corporation tax has fallen, many companies have found themselves with increasing sums of surplus cash. Directors and shareholders do have to consider how to put the surplus cash to good use and many have therefore chosen investment in both residential and commercial property.

For many, investing in property has proven to be a successful strategy. However, the increase in property values may create an imbalance in the business assets such that a property portfolio may be worth as much, if not more, than the value of the trade. We are seeing more instances where this is the case. As a consequence, directors and shareholders are looking to de-risk their business and investment property activities by demerging their company’s interests into two or more individual companies or groups.

A problem in carrying out a relatively simple process of transferring trades, properties or other company assets is that the transfer is likely to crystallise some significant tax liabilities. Although the demerger of business activities is for good commercial reason and with no realisation of cash for the shareholders, anti-avoidance tax rules generally give rise to tax charges both on the company / companies involved and their shareholders. By following processes set down in legislation, the demerger of a property portfolio from trading activities can be achieved with minimum or no immediate corporation tax or income tax cost, subject to shareholders retaining the same value of their interest, both before and after the demerger. Careful planning around Stamp Duty Land Tax will also be essential where a demerger involves properties.

Given the economic uncertainty of the consequences of UK Brexit negotiations on businesses, de-risking trading activities and property portfolios are coming more into focus.

You can find a more detailed explanation of the mechanics of a demerger process in our ‘Corporate Demergers’ publication which is available for download here:

Should you require any further information or wish to discuss de-risking your company’s business exposure by way of a demerger, please do not hesitate to contact your usual partner.