Demergers—an introduction to the tax issues
Produced in partnership with Zoe Feller of Bird & Bird and Robert Langston of Saffery Champness

The following Tax practice note produced in partnership with Zoe Feller of Bird & Bird and Robert Langston of Saffery Champness provides comprehensive and up to date legal information covering:

  • Demergers—an introduction to the tax issues
  • Statutory demerger
  • Capital reduction demerger
  • Liquidation demerger
  • Pre-demerger restructuring
  • Intercompany transfers
  • New holding company
  • New subsidiary companies

Demergers—an introduction to the tax issues

A demerger means the separation of a company’s business into two or more parts, typically carried on by successor companies under the same ownership as the original company.

Commercial reasons for carrying out a demerger typically include:

  1. separating a business in advance of a sale or other transaction

  2. introducing different shareholders (or options holders) to one business but not another

  3. separating businesses with different risk, regulatory or commercial profiles

  4. resolving a shareholder dispute

  5. unlocking value from an underlying business

  6. hiving off a non-core business as a group matures, or

  7. as an alternative to a sale

There may also be tax benefits from a demerger, for instance:

  1. investment businesses can be separated from trading businesses, so that trading businesses can qualify for:

    1. business asset disposal relief (formerly entrepreneurs' relief)

    2. the substantial shareholdings exemption, or

    3. inheritance tax business property relief, see Practice Note: IHT—business property relief, and

  2. the proceeds of any sale of a demerged business will be realised directly by the shareholders, therefore any gain may qualify for business asset disposal relief

However, where tax is the only reason for undertaking a demerger the various commercial purpose tests are unlikely to be satisfied, and HMRC may refuse to give clearances.

In practice, demergers are usually triggered by commercial pressures, and a business undergoing a demerger will want to minimise, and ideally eliminate, any tax

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