Transaction Tax

Buying or selling an asset or company is one of the most complex activities you can undertake and tax can have a massive impact on the outcome. With more than 10 years’ experience in advising companies, managers and investors on all manner of transactions, we are extremely well placed to advise you on how to ensure that the tax aspects of your transaction proceed as smoothly as possible. 

How we can help:

Advice to sellers

  • Vendor tax planning to preserve value and to enable reliefs and exemptions to be claimed;
  • Maximising the benefit of capital gains tax reliefs, including Enterprise Investment Scheme (“EIS”) relief and entrepreneur’s relief. EIS relief enables eligible investors to benefit from income tax relief when investing in qualifying companies and to pay no capital gains tax when they sell, whilst entrepreneur’s relief provides a 10% capital gains tax rate if the qualifying conditions are satisfied;
  • Advising on the conditions of any 'earn-out' mechanism or equity rollover;
  • Incentivising management through shares and share options, helping to ensure that their interests are fully aligned with those of the major shareholders;
  • Pre sale assistance to clean up legacy tax issues and to enable the company’s tax position to be presented as cleanly as possible. This should reduce value erosion during the sale process because the purchaser is not left to discover confidence destroying surprises during due diligence. It can also enable the warranties and indemnities that the seller will provide to become less restrictive;
  • Preparation and submission of tax clearances to HMRC; and
  • Advising on the tax aspects of the transaction documents, such as the tax warranties and the tax deed in the sale and purchase agreement.

Advice to buyers

  • Tax due diligence to ensure that you understand the tax position and any liabilities of a company you are buying;
  • Deal structuring to ensure that the transaction proceeds without incurring unexpected tax complications or liabilities and that the corporate structure post transaction is fit for purpose;
  • Tax efficient financing for both UK and cross border deals;
  • Cross border transaction structuring for UK and foreign companies, enabling profits to be earned and repatriated to shareholders with minimal tax costs;
  • Managing tax liabilities in newly acquired companies, particularly where such liabilities have not been resolved before sale;
  • Advising on the tax aspects of the transaction documents, such as the tax warranties and the tax deed in the sale and purchase agreement; and
  • Advising on the tax deductibility and VAT recoverability of professional deal related costs.

Where a client is considering a future sale, our initial discussions typically revolve around how to split out businesses that they may wish to retain.  This is also relevant if say a client merely wishes to separate a more risky side of the business away from a more valuable or stable operation.  There are a number of ways this may be achieved, however, an overview of 3 established rates are explained below:-

Company Demergers

There are many reasons for wishing to demerge a company and the different interests of shareholders means that no two demergers will be the same. As an example there may be a desire to separate businesses to be run by different management teams but with virtually the same shareholders.

Legislation has developed three methods of demerging: statutory demergers (sometimes called exempt demergers), capital reduction and demergers under the Insolvency Act 1986 (sometimes called liquidation demergers or Section 110 demerger).

Statutory Demerger

A statutory demerger can be of two types, direct and indirect.

  1. In a direct demerger, a parent company pays a dividend in specie of the shares of the subsidiary that is to be demerged.
  2. In an indirect demerger, the parent company declares a dividend satisfied by the transfer of a subsidiary or assets of a trade to a newly incorporated company (“Newco”). In return for the shares or assets of a trade, Newco issues shares to shareholders of the parent company.

For the shareholder there is no income tax or capital gains tax (“CGT”) charge. For the company there will be no de-grouping charge and in most cases there will be no CGT charge.

There are a number of conditions to be met, such as the trading status of the companies involved and the need of the distributing company to divest itself of at least 90% of the demerged subsidiary. The demerger needs to wholly or mainly for the purposes of benefiting some or all of the demerging activities and the demerger must not form part of a scheme or an arrangement to avoid tax, among other things.

There are a number of stringent conditions for a statutory demerger. The company must be a 75% trading subsidiary in the EU. There needs to be distributable reserves. The tax exemptions will be denied if, within five years, there is a chargeable payment (that is, a payment to the shareholders of any of the companies involved). In practice this means that statutory demergers are not suitable where the demerger’s purpose is to facilitate a sale.    

Capital Reduction Demerger 

In a typical capital reduction demerger, the group parent reduces capital by transferring the demerged subsidiary to a Newco which in turn issues shares to the parent’s shareholders.

For the shareholders there is no income tax or CGT charge. For the company there is no CGT charge but, unlike a statutory demerger, there is no outright exemption from de-grouping charges. Such a charge should not arise in practice if the holding falls within the Substantial Shareholding Exemption or if the intra-group vendor and purchaser subsequently leave the group at the same time.

It is no longer necessary for non-public companies to go to court to get approval for the reduction in capital. Instead they would pass a special resolution, supported by a directors’ solvency statement.

Liquidation demergers

In a typical liquidation demerger, the parent company of a group is placed into liquidation and it distributes its holding of shares in its subsidiaries to Newcos, which in turn issue shares to the parent’s shareholders. A common alternative involves the creation of a new group parent as an intermediate step, which reduces the number of creditors the liquidator needs to consider and makes the process simpler and reduces cost.

For the shareholders there is no income tax or CGT charge. For the company there is no CGT charge and neither in practice will there be a de-grouping charge (although care must be taken when there is valuable intangible property, e.g. goodwill, intellectual property etc.)

As liquidation demergers are not affected by the same five year chargeable payments to shareholders condition (associated with statutory demergers), liquidation demergers are more readily considered if a future sale is contemplated (although planning must be implemented well in advance of any actions being taken to market the company).

VAT and Stamp Duty

VAT, Stamp Duty and Stamp Duty Land Tax can apply on demergers and if planning is not carefully considered the tax liabilities arising can be deal breakers, so it is important to ensure that the demerger is structured so that it falls within the reliefs available.