Demergers—an introduction to the tax issues
Produced in partnership with Robert Langston of Saffery Champness
Demergers—an introduction to the tax issues

The following Tax guidance note Produced in partnership with 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

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, or

  3. separating businesses with different risk or commercial profiles

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. entrepreneurs' relief

    2. the substantial shareholding 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 entrepreneurs’ 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.

A business undergoing a demerger will want to minimise any tax charges triggered by the demerger itself. The main concerns are likely to be:

  1. that the receipt of shares in the successor company by the shareholders of the target company is not charged to:

    1. income tax (or corporation tax on income) as a distribution, or

    2. capital gains tax (or