Demergers: The three main reasons why businesses break up

By Pete Miller, tax expert at The Miller Partnership

The Miller Partnership is often asked to advise on company demergers, but what exactly is a demerger and why would you want to do one?

Put simply, a demerger is the breaking up of a company into two or more smaller ones. In principle, it’s a straightforward process, but the tax aspects can be complex.  There are special exemptions and reliefs from tax which will allow you to demerge pretty much tax free, subject to certain conditions, so you will need expert professional tax advice.  The reason for the demerger is pretty vital, as HMRC will only allow a demerger if there are commercial reasons for it.

In my experience – I also used to be the Inland Revenue’s demergers expert – people demerge their companies for three main reasons.  Let’s look at the different scenarios in more detail:

  1. Selling your trade while retaining your premises

One of the most common reasons for wanting to demerge a business is so that the owners can keep control of the property – often the premises they work from – when they sell their business.

Let’s imagine you’re selling a carpentry business run through your company.  A potential buyer comes along who is interested in purchasing your trade, but not the workshop it operates from. It may well be that your purchaser already has premises so doesn’t want or require yours.

By demerging, you can sell your carpentry business without having to sell your premises. And, it’s an option many buyers choose if they want to actively keep the bricks and mortar assets as an investment property.

In this scenario I will set up a demerger arrangement which leaves you with a property company and a separate trading company, which you can sell. This allows you, the seller, to retain the property, and enjoy the rental revenue it provides, into retirement.

  1. Falling out with your business partner

The second demerger scenario I see very often is where business owners have fallen out and want to go their separate ways. This might sound rather dramatic, but often it’s nothing personal – it’s just that they have different, incompatible ideas about their business’s direction.

Let’s take, for example, a rental property company which is looking to diversify.

One owner might be keen to go into luxury apartments, investing heavily in designer kitchens and high-spec fittings. Meanwhile, the business partner is focused on volume rather than value and would prefer to go into the student flats market.  Clearly, these are incompatible, so a sensible response might be to separate the two interests, so that each shareholder can go their own way.

Another example might be where a professional services firm decides to divide its client base between the two owners.  Perhaps one runs the Leicester branch while the other partner is responsible for the Loughborough office, and they would both prefer to operate completely independently. Again, this decision won’t necessarily have been reached because the two partners can’t abide each other but it’s a perfectly sensible reason to demerge.

  1. Retirement planning

The third most common reason for demerging, falls somewhere between scenarios one and two. It might involve successful business owners who have got on fine for many years but are now planning for retirement and want to pass their wealth onto their children.

But, although the two have a good relationship, it might be that their kids don’t know each other well, and there is no guarantee they will get on or even want to be in business together. In such cases, it makes sense for owners to split the company and take their shares separately.  That way, they can each provide for their own children in the manner that they think most appropriate, avoiding any problems further down the line.

If you’re considering marketing your business, it’s important to start getting it ready for sale, which might include a demerger, at least two or three years before you plan to sell it. By doing so, you’ll be able to show that the demerger is for commercial reasons and it should be easier to get the appropriate advance clearance from HRMC.

We are experts in demergers so contact us today. Email pete.miller@themillerpartnership.com or call us on 0116 208 1020.