How does a company demerger work for tax purposes in the UK?

Full answer

A demerger involves splitting a company group so that two or more businesses that were formerly held under a single company structure become separately owned. There are two main routes in UK tax law. 1. Statutory (exempt) demerger -- ICTA 1988 ss213-219 Conditions for exemption: -- The demerging company must be a trading company or holding company of a trading group -- The company(ies) being transferred must be trading companies or sub-holdings of trading groups -- The transfer is to existing shareholders in proportion to their current holdings (or in a way that does not create an unfair advantage) -- The main purpose must not be to facilitate a change of control or avoid tax -- No "chargeable payment" must be made within five years to the shareholders that is related to the demerger Tax effect on shareholders: -- Shareholders receive shares in the new subsidiary company as a distribution -- The distribution is not a chargeable distribution for income tax purposes (normally distributions from companies are taxable as dividends) -- No CGT arises on the receipt of the new shares -- The CGT base cost of the original shares is apportioned between the old company and the new company shares Tax effect on the demerging company: -- No chargeable gain arises on the transfer of shares in the subsidiary (the disposal is at no gain/no loss) -- Degrouping charges (CTA 2009 s779) may arise on assets held by the subsidiary that were transferred within the group in the past six years -- this is a key risk to check 2. Section 110 liquidation demerger An alternative involves placing the demerging company into a members voluntary liquidation (MVL) and having the liquidator divide the assets into two "pots" distributed to different shareholder groups. Shareholders receive their respective assets as capital distributions -- taxed as CGT rather than income (and Business Asset Disposal Relief / BADR may apply at 14-18% CGT). HMRC clearance Advance clearance under CTA 2010 s748 (for statutory demergers) or TCGA 1992 s138 should always be sought before proceeding. HMRC usually responds within 30 days. The clearance confirms that HMRC will not invoke anti-avoidance provisions.

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