What is a Section 110 (s110) Demerger and how can you use it?

What to consider before choosing a s110 demerger? 

The key thing to bear in mind, with any type of demerger, is whether the process aligns with your objectives. You should consider: 

• The reasons why you want to demerge. For example, perhaps you are considering demerging a trade from a more risky trade to mitigate the different risks, and have no immediate plans to sell, then a s110 demerger may not be the most appropriate choice given that a statutory demerger would allow you to achieve the same results in less steps.  

Or perhaps, you have a property investment business and are wanting to demerge as a result of a shareholder dispute (partition demerger). If this is the case, then a s110 demerger may be more appropriate given that ownership will be divided amongst distinct shareholders groups.  

• What you are looking to demerge. Are you considering demerging a property business/trade/investment business? In the case of a property business, it is not possible to undertake a ‘statutory demerger’ as this is only available to split trades. 

• How quickly you want to demerge. There are a lot of considerations pre-liquidation that need to be taken into account, which if not dealt with can slow down the process, especially if there is a tight deadline. This includes the indemnification and appointment of a liquidator – a key step. Using an experienced team will certainly assist in negotiating all of these potential pitfalls. Consideration also needs to be given to the updating of existing contracts, or the creation of new contracts, this includes new contracts with suppliers, and opening of new bank accounts for the new companies – all of which takes time. 

In some situations, a reduction of capital demerger may be more appropriate, particularly if the idea of liquidation doesn’t appeal to your shareholders.  

Why use this method? 

A s110 demerger is one of the two primary methods available for demerging a property or investment business from a company, with the other option being a reduction of capital demerger. We frequently encounter s110 demergers in scenarios where a company opts to separate its property business portfolio. With this in mind, the following information focuses on the demerger of a property business from a company. 

Our most common advice to business owners is to not mix their business and property of any type in a company as this has commercial and potentially capital tax ramifications. If the property becomes valuable, or is an investment asset, then it can be important to remove this from the company. 

The s110 demerger allows for the property to part from the company into another corporate vehicle owned by some or all of the shareholders of the trading company. This is done in a tax neutral way via a liquidation which ensures at both company and owner level there is minimal (in some cases, none) tax leakage. 

In some cases, dependent on how the demerger is structured, it is possible that any demerged capital assets could obtain an uplift to market value for capital gains purposes. This can save a considerable amount of tax on a future sale of these assets. 

While there are other methods of demerger this one is particularly popular for demerging property businesses. 

Are there many risks associated with this type of demerger? 

All tax planning involves an element of risk. This is a method adopted regularly and we work together in the tax and insolvency side of the practice to ensure any issues are picked up and dealt with during the process. 

If not properly implemented, all the following taxes will need to be considered, however many of the risks can be mitigated by obtaining advanced clearance from HMRC. This includes: 

• Income tax – The current Additional Rate on dividends is 39.35%, and there is a risk that HMRC will seek to impose an Income Tax charge on distribution received by the shareholders.

• Corporation tax and Capital Gains Tax (CGT) – When disposing of assets to a connected party, such as transactions between a company and its shareholders, then there is a deemed market value rule which may result in a charge of CT on any gain arising, computed by reference to the market value. Main rate CT on the disposal of these assets is currently 25%, and for additional and higher rate taxpayers the CGT rate is 20%. 

*In most cases it should be possible to fully mitigate CT and CGT. 

• Stamp Duty Land Tax (SDLT) and Stamp Duty on shares – Claims for relief can be made after transaction. For partition demergers, and in some other rare cases, Stamp Duty on shares and/or SDLT liability should be expected. 

• Inheritance Tax (IHT) – Is the company included in the shareholders estate and do they qualify for Business Property Relief? The splitting of a company, or perhaps more applicably a trade, may see what was once a ‘friendly’ IHT business become ‘unfriendly’.  

• Corporate Tax and SDLT de-grouping charges – on assets previously transferred in a group. 

• Protection of losses 

• VAT 

We will fully review the proposed transaction from a tax perspective and would always recommend our clients get clearance from HMRC to mitigate risks. 

What about the liquidation aspect? 

Our Insolvency and Recovery team deal regularly in business reconstructions and solvent liquidation work. It is a common misconception that insolvency practitioners (“IPs”) only liquidate insolvent companies or are appointed to failing businesses. 

The role of the liquidator in these situations is often undervalued. However, the liquidator is essential to the process, and it is a requirement that the liquidator is licensed to act as such.  

These are just some of the things to consider when demerging property: 

• Is the bank ready to release security? 

• Will the landlord transfer leases? 

• Can contracts be novated? 

• Will the insurance cover continue in the “New Co”? 

• Do you have experienced legal advisors? 

Closing thoughts 

Successfully navigating a demerger, particularly a Section 110 (s110) demerger, requires careful planning and a thorough understanding of both the process and its implications.  

The key to achieving a successful outcome lies in early preparation and clear communication among all parties involved. Establishing a timeline and ensuring that everyone understands their responsibilities can help prevent delays and misunderstandings, making the process smoother and more efficient. 

How Price Bailey can help 

As part of a demerger, our experts will produce a comprehensive tax report outlining each step in detail and the tax implications of each step on different parties involved. You will be given a copy of the finalised report to retain for your records. 

If you have valuable property assets mixed in with your business, which you would like to consider demerging, or a property portfolio held in a company which has some riskier investments within it, then please get in touch to arrange a free initial meeting.