Life has not yet returned to ‘normal’ and many businesses are considering what this will look like in the future. There are a variety of outcomes for businesses having survived throughout the pandemic.
Business as usual – but smaller
For some, their business is still intact, albeit on a smaller scale and there are many tax implications to consider.
- Reduction in workforce and a reduced requirement for space can mean businesses can release capital by selling premises with the possibility of offsetting any capital gain with a trading loss for tax purposes.
- If one of the businesses has ceased or decreased significantly in size, there are many tax-neutral ways to reduce the number of companies in the group.
However, although the method you choose to achieve your aim should not be driven primarily by the tax outcome, it should always be a key consideration before undertaking any reorganisation.
Business as usual – but bigger
Although times have been tough for many, some businesses have thrived in the pandemic and now need to manage their new growth. Although a business can operate with different income streams, there is sometimes a need to ringfence separate activities. A business can reorganise itself in different ways whilst taking into consideration commercial risk, including:
- Demerging to create new entities
- Creating a new subsidiary
- Incorporation, perhaps to protect the business with limited liability that was not previously in place – this can often be managed with no tax cost using what is known as incorporation relief
- Acquisition of a completely new business
A larger operation often calls for a review of whether the infrastructure is fit for purpose. We would advise any business to have a business plan but emphasises that this is never more important than when a business is growing or becoming more complex.
Business as usual – new ownership
Another reason a business may be looking to reorganise is to reflect new ownership. The recent months may have caused people to decide that it is time to exit or retire from the business.
Selling a stake in a business can be achieved either by a company share buy-back or via selling the business to a new company. The latter also presents an opportunity to introduce new investors or shareholders and focus on thinking about incentive plans such as the Enterprise Management Incentive, which enables share options to be granted in a tax efficient framework.
An outgoing shareholder may simply wish to de-risk their investment and realise the existing value. We advise that individuals should consider making personal financial plans as this is as important as planning in a business context.
The construction, land and development sector has weathered many tax changes in recent years. One tax reorganisation solution in this dynamic sector is often a demerger split of land activity where a business can take advantage of some of the appropriate tax reliefs.
There are three main types of demerger:
- Statutory or Exempt Demerger
- Liquidation Demerger
- Capital Reduction Demerger
Any type of demerger needs to be structured in a way that avoids tax for both shareholder and the original company. Separation of a group into its trading and non-trading components can protect valuable tax reliefs – Business Property Relief (IHT exemption) and Business Asset Disposal Relief. Tax exemptions are not always possible for non-trading companies or when the demerger has been undertaken with a view to change of ownership or possible future sale.
Transactions such as demergers and reconstructions are complex by nature and taking specialist advice is essential to ensure a smooth transition and to avoid overpaying tax. There is often a way to ensure that a transaction is both tax neutral and cleared by HMRC before execution. In addition, there are also legal and financial matters to think about, but all can be managed with the right team around you.
If you would like further guidance or advice, contact Jacqui Gudgion.