Splitting a company – tax efficiently

Splitting a company can be a smart move—whether you’re separating a struggling division, preparing for a management buyout, or simply streamlining operations. However, the tax implications are significant, and getting it wrong could cost you thousands in unexpected liabilities. This guide explains the main tax considerations under current UK law and how to approach a company split efficiently.

Understanding the tax consequences of company splits

When you split a company, HMRC treats the transaction as a disposal of assets or shares, depending on how you structure it. The key question is: will you trigger corporation tax on any gains?

If you’re transferring assets (rather than shares) to a new company, any increase in value since acquisition becomes a chargeable gain. For the 2024/25 tax year, corporation tax sits at 25% for profits over £250,000, with marginal relief for smaller profits. That gain could be substantial if your assets have appreciated significantly.

Alternatively, if you’re hiving off a subsidiary by dividing shares, you might avoid an asset-level disposal—but the shareholders selling their stake could face capital gains tax. The CGT annual exemption is £3,000 for 2024/25, and gains above that are taxed at 20% for higher rate taxpayers (10% for basic rate).

The structure you choose makes all the difference. That’s why professional advice upfront saves headaches later.

Section 213 relief and Holdover Relief

Two reliefs can significantly reduce your tax bill: Section 213 TCGA 1992 and Holdover Relief (if available).

Section 213 relief applies when a company transfers assets to another company in exchange for shares. If certain conditions are met, the transfer can be treated as a no-gain/no-loss disposal, deferring the tax until the recipient company eventually disposes of the assets. This is one of the most valuable reliefs for company splits.

Holdover Relief (under Section 165 TCGA) can also apply in some circumstances, allowing the tax on gains to be deferred rather than paid immediately. However, the rules are restrictive and generally require the transferor to retain an interest in the asset or business post-transfer.

To claim either relief, you must file the correct documentation with HMRC and meet strict conditions. Missing the procedural requirements means losing the relief entirely.

Structuring the split: asset versus share disposal

Your two main options are:

Asset disposal: You transfer specific assets and liabilities to a new company. The original company retains others. This gives clean separation but can trigger corporation tax on gains and may require novating contracts. Environmental or employment liabilities can also transfer unexpectedly.

Share/subsidiary split: You establish a new company, hive off part of your business as a subsidiary, and then transfer shares. If structured correctly, this can qualify for Section 213 relief. However, it requires more careful planning and may be slower to implement.

A share split is often more tax-efficient if you own 100% of the original company, but it’s not always practicable if you’re separating operations mid-flight.

Practical considerations and timing

Beyond tax, several practical issues affect the split:

• Companies House registration: Allow 4–8 weeks for incorporation and filing of articles
• Contract transfers: Lease agreements, supply contracts, and customer agreements often require consent to transfer
• Employment: Consider whether employees transfer with assets or remain with the original company (implications for redundancy costs and continuity)
• IP and licences: Some intellectual property may be tied to the original company name or registration

Timing matters. If you’re planning a split for a specific tax year, the date assets transfer determines when gains crystallise and relief claims must be made. HMRC is strict on deadlines.

Conclusion

A company split can unlock real value—separating a loss-making division, enabling a management buyout, or simply allowing focused management of distinct operations. But the tax tail shouldn’t wag the business dog. With careful structuring, Section 213 relief and other provisions can defer or eliminate corporation tax entirely.

The key is planning ahead. A poorly structured split might cost 25% in corporation tax plus 20% in CGT on top—easily six figures on a moderate transaction. Getting it right from day one costs far less than unwinding a tax-inefficient arrangement later.

For tailored advice, contact Severn Accounting — we’re here to help.