Liquidation demergers
Liquidation demergers

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Liquidation demergers
  • When is a liquidation demerger appropriate?
  • Which tax clearances are needed?
  • Steps in a liquidation demerger
  • Step one—insert a new holding company
  • Tax implications
  • Step two—transfer one business to the new holding company
  • Tax implications
  • Step three—liquidation of the new holding company
  • Tax implications for the shareholders—income
  • More...

This Practice Note is about the tax implications of liquidation demergers, also known as section 110 demergers, after section 110 of the Insolvency Act 1986.

For background on why a company might carry out a demerger, and an introduction to the other ways in which a demerger may be structured, see Practice Notes: Demergers—an introduction to the tax issues and Demergers—an introduction for corporate lawyers.

More detailed Practice Notes describe the tax issues associated with the main demerger routes, namely:

  1. statutory (or dividend) demergers, which may be direct or indirect—see Practice Note: Statutory demergers

  2. capital reduction demergers—see Practice Note: Capital reduction demergers, and

  3. liquidation demergers—which are the subject of this Practice Note

A liquidation demerger normally involves the insertion of a new holding company at the top of the group, followed by a liquidation of the new holding company in which the liquidator distributes the businesses that are being demerged to two new companies, which each issue shares to the shareholders.

Unlike a statutory demerger, a liquidation demerger does not qualify for the tax reliefs that are specifically available for exempt distributions. It may, nonetheless, be carried out in such a way that it does not trigger tax charges, either on income or capital, for the shareholders or any of the companies involved in the demerger. This relies on ensuring that the demerger qualifies as a reconstruction for

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