Taxation (UK) Consequences of Management Buy Out and Hive Down

What is a Hive Down?

One company incorporates a subsidiary, i.e. becomes Parent of another company and transfers trade and assets to this new company. The subsidiary is then sold to a third party.

Tax Advantages:

A ”clean” company (containing assets purchaser requires) is acquired by the purchaser.
Unrelieved tax losses become available in new company
Capital losses, non trading IFAs are not transferred.

Tax Disadvantages:

Tangible assets are not transferred at no gain / loss, however, de-grouping charge may arise if asset sold within 6 years of transfer.
Sale of new company may give rise to chargeable gains.
Exemption of Stamp Duty Land Tax would not be available due to sale of new company within three years of transfer.

What is Management Buy Out?

Purchase transaction in which existing management of a company purchases business from shareholders.

Tax Consequences:

If managers are given favorable terms then income tax consequences arise;

  1. If shares acquired at less than market value, difference charged to employment income
  2. In case shares acquired are partly paid, difference deemed to be employment income and amount treated as beneficial loan.

There is relief for management obtaining loan for financing MBO;

  1. Managers must hold at least 5% of shares
  2. Managers must be full time working employees