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Capital Reduction Demerger

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C Shah

Posted on:
19/08/15 15:24
Subject: Capital Reduction Demerger

I had a SDLT query on a demerger transaction.

Background

A UK registered and resident Limited Company is currently carrying on 2 trades - one comprises of management of residential properties (sort of like estate agents), and the other is it receives rental income from its property portfolio. The directors of the company wish to separate out the trades and they have a bona-fide commercial reason for separating the trades. One option was a demerger, most particularly a capital reduction demerger. The steps for the demerger will be as follows:

Step 1 ? a holding company (HoldCo) will be set up above the current company (Company A). The sole-shareholder (A) will hold 100% of the shares in HoldCo which in turn will own 100% of shares in Company A.

Step 2 ? There will be a distribution in specie of the residential properties (which are all unencumbered) held by Company A to HoldCo. In my opinion, there will be no SDLT due as it is a distribution in specie (Section 54 (4) Finance Act 2003) and there is no consideration as the properties are all unencumbered and HoldCo will not assume any debt.

Step 3 ? HoldCo will carry out a capital reduction of the shares it holds in Company A by an amount equal to the value of Company A (which will be less than it was following the distribution of the residential properties to HoldCo).

Step 4 ? A New Company (NewCo) will be incorporated with A being the sole-shareholder of NewCo.

Step 5 ? Company A is transferred to NewCo and NewCo issues shares to A being the sole-shareholder of HoldCo. Effectively, A will own 100% of the shares in NewCo which in turn owns 100% of the shares in Company A. In my opinion, there will be no SDLT at Step 5 when Company A is transferred to NewCo as we are not relying on the SDLT group relief provisions when the residential properties in Company A are transferred to HoldCo via an in-specie distribution. We also believe there is no stamp duty due in relation to Step 5 as we can rely on Section 75 of Finance Act 1986 (Reconstruction relief).

I would welcome input from Patrick Cannon and any other forum contributors that no SDLT or Stamp Duty will be due in relation to the above transactions.

Patrick

Posted on:
31/08/15 11:08
Subject: RE: Capital Reduction Demerger

Hi Mr Shah, thanks for your post but my discussion forum is not really the place to provide specific advice of this nature and I would suggest seeking specialist bespoke advice which will be covered by agreed terms of engagement and professional insurance that you will be able to rely on. Having said that there may be one or two users who will be willing to advise on this and if so I will post such replies but without liability on my part.
Justin Bryant

Posted on:
02/09/15 18:39
Subject: RE: Capital Reduction Demerger

Assuming you get the appropriate HMRC clearances (and a decent lawyer implements this), then I don't see any problems with this.
Gordon McCaw

Posted on:
25/09/15 10:36
Subject: RE: Capital Reduction Demerger

Would S75 relief apply here? Not sure it would as shares are not being issued to the shareholder of the target company i.e. the first new holding company

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