Splitting a Family Company: What Are the Tax Implications?
As businesses grow, it’s not unusual for things to change. Different directors may take responsibility for different areas, or plans for the future may no longer align.
In some cases, the decision is made to split a family company into two or more separate businesses. But while this can make commercial sense, it also raises an important question:
How do you do it without creating unnecessary tax costs?
Why Do Businesses Split?
There are plenty of reasons why a demerger might be considered.
You might want to separate different business activities, especially if one carries more risk than the other. Or perhaps different shareholders want to go their own way and take control of the part they’ve been running.
In some cases, a split is also part of a longer-term plan—such as preparing part of the business for sale.
Whatever the reason, the goal is usually the same: to separate the business in a way that is as tax-efficient as possible.
The Key Tax Consideration: Capital Gains Tax
One of the biggest concerns when splitting a company is capital gains tax (CGT).
When assets are moved from one company to another, HMRC normally treats this as if they’ve been sold at market value—even if no money actually changes hands. This can trigger a tax charge.
However, there are reliefs available. In particular, rollover relief may allow gains to be deferred, meaning you don’t pay tax immediately.
The key is making sure the structure of the demerger meets the necessary conditions.
Two Main Ways to Split a Company
There are two common approaches to carrying out a demerger.
- Statutory (Exempt) Demerger
This is often the preferred route where possible.
In simple terms, the company transfers part of its business to a new company, and shareholders receive shares in that new company. This is usually done as a “distribution in specie”.
If certain conditions are met, the transfer can take place on a “no gain, no loss” basis, meaning no immediate CGT or income tax is due.
To qualify:
- The company must continue trading
- The split must be for genuine commercial reasons
- There must be no cash payment (other than taking on liabilities)
- The company must have enough distributable reserves
This route can be very tax-efficient—but it does require careful planning.
- Non-Statutory Demerger
If the conditions for a statutory demerger can’t be met, an alternative is the non-statutory route.
This involves placing the original company into voluntary liquidation, with the business assets distributed to new companies owned by the shareholders.
It can achieve a similar end result, but the process is more complex—and the original company will cease to exist.
What About Stamp Duty?
Stamp duty is another factor to consider.
In some cases, it can be reduced or even eliminated if the transaction qualifies for reconstruction relief. To qualify, the structure must meet certain conditions, including:
- The transaction must have a genuine commercial purpose
- Ownership in the new companies should broadly mirror the original
- The transfer is mainly in exchange for shares
It’s also important to seek advance clearance from HMRC. This gives you confidence that the transaction will be treated as intended.
Don’t Overlook VAT
VAT is often forgotten—but it can still be relevant.
If the business is transferred as a going concern, there may be no VAT to pay. However, strict conditions apply, including that the new company continues the same type of activity.
Are There Other Options?
A full demerger isn’t always the only solution.
Depending on your situation, alternatives such as a share-for-share exchange or a reduction in capital might achieve a similar outcome in a simpler or more tax-efficient way.
So it’s always worth asking: is a demerger definitely the best route?
Planning Is Key
Splitting a company is rarely straightforward, especially when tax is involved.
While it may be possible to avoid or defer tax in many cases, the rules are detailed—and getting it wrong can be costly.
That’s why careful planning, and the right advice, is essential from the outset.
Let’s Talk
Thinking about splitting your business, or planning for the future?
At Jon Davies Accountants, we work with business owners across the UK to structure changes in a way that’s both practical and tax-efficient.
If you’re considering a demerger or want to explore your options, get in touch with Jon or the team today.
If you found this useful, please share it using the icons at the side of the page, or leave a comment below.
Any questions?
If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant
- You can ring us on 0151 380 8080
- You can email us at gr****@*********************co.uk