When business is being undertaken via a limited company, shareholders may be presented with opportunities to sell certain assets, rather than the entire trade and assets held within that company. In other words, the buyers only want to buy part of their business.
This can be for a number of reasons, such as the company containing a trading property which the buyers do not require (or sometimes, the owners wanting to retain and rent back to them). Alternatively, the company may be undertaking two distinct, separable, trades, and the buyers only want one of them.
Whichever the reason, this leaves the shareholders with some pre-sale tax planning to consider. Without any planning, the default position would be that the company would sell the assets the buyer wants, and pay corporation tax, leaving the shareholders with a company, containing the sale proceeds and the part of the business the buyer did not want.
This leaves the shareholder either having to extract the money by way of dividend, suffering income tax at a rate of up to 39.35%, or them having to wait until they are ready to liquidate the company to extract at capital rates. Either way, there is effectively a ‘double tax’, i.e. the company pays corporation tax, and the shareholders pay personal tax.
Some options that can be considered in these scenarios are listed below.
This involves separating the business into two separate groups (one group holding the assets the shareholder will retain, and the other containing the assets the shareholder will sell). This allows the business being sold to be done so via a sale of shares, such that the shareholders are receiving the proceeds from the sale in a capital way. It also avoids the company paying corporation tax, thereby eliminating the ‘double tax’ issue.
A HMRC clearance is always recommend under this route, and HMRC will only grant clearance if there are valid non-tax reasons for the demerger. It was previously thought that HMRC will not grant clearance for a demerger prior to a sale, however this is not necessarily the case. As long as it can be demonstrated that the reason for the demerger is that there is a small part of the business that the buyers do not want, and without the demerger this would stand in the way of the commercial deal, we have found HMRC providing clearance in these scenarios. Where they are less likely to give clearance is when only a small part of the business, or a standalone asset, is being sold.
A ‘Hive Down’
This involves the trade and assets that are being sold being transferred down to a new subsidiary first. The shares in that subsidiary are then sold by the existing company. If the ‘substantial shareholding exemption (SSE) applies (which is a corporation tax exemption that exempts gains on sales of shares by another company) this means no corporation tax is payable on the sale, therefore eliminating the ‘double tax’ issue.
What this route doesn’t do is get the sale proceeds in the hands of the shareholders in a capital way, i.e. as with the ‘default’ position above, the proceeds would still be left in the company. However, it can get round the corporation tax issue, so may be appropriate in scenarios where the shareholders are not planning on extracting the proceeds, and instead want to reinvest in the remaining business.
This is also unlikely to be efficient for standalone companies, as SSE requires the assets that are hived down to be either used in the subsidiary for 12 months (which is unlikely to be the case as often hive downs are back-to-back with a sale) or used in a member of a group for 12 months prior. The existing company would be a member of a group provided there is at least one other company in the group (even a dormant subsidiary).
A ‘Hive Up'
This involves a new holding company being inserted above the existing company by way of ‘share for share exchange’. In other words, the shareholders would swap their shares in the existing company for shares in the new holding company. HMRC clearance is recommended. The trade and assets being retained are then hived up to this new holding company, enabling the shares in the existing company to be sold. Unlike option 2, SSE isn’t needed, as the base cost for the shares in the existing company effectively ‘re-base’ on the share exchange, such that any gain between the share exchange date and the sale of the subsidiary should be quite minimal.
As with the hive down route, this avoids the corporation tax on the sale, but still leaves the proceeds in a corporate wrapper.
There may also be stamp duty under this route.
The choice between this route and the hive down route will often depend on the availability of SSE and also which assets are easier to move from a legal and practical point of view (i.e. is it easier to move the assets being sold or the assets being retained?).
The assets are bought out of the company by the vendors
A simpler route is for the value of the assets being retained being added to the consideration for the share sale, but the sellers then agree to use part of those extra proceeds to either buy the assets from the company (immediately post completion) or loan those funds to a new company to enable that new company to buy the assets from the company they have just sold.
There is typically corporation tax under this route (depending on the base cost of the asset) and there might be stamp duty land tax if it involves a property.
The sellers would pay capital gains tax on the additional proceeds, but, if a new company is used, the shareholders would have a director’s loan account credit with that new company which they can drawn down on, therefore saving income tax on extracting those profits later on.
This route can be appropriate where the company being sold is owned by more than one shareholder, but perhaps not all of those shareholders want to retain the assets in question. Alternatively, it may be the demerger route isn’t an option (perhaps as clearance hasn’t been granted, or there isn’t enough time to implement a demerger).
As you can see, there is a lot to consider when it comes to selling part of a business. A demerger is often the route shareholders choose due to the potential tax efficiencies that can bring, however it will not be suitable in every scenario, and will not always be given clearance by HMRC.
Rickard Luckin can advise you on the most appropriate route for your scenario. We would help the shareholders decide on an appropriate route, assist with the preparation of a step plan and clearance application (if required) and work with your solicitor to implement the steps efficiently.
If you have any questions about the above, or would like more information specific to your circumstances, please enter your email address below and we will get in touch: