Demergers

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FORTHCOMING CHANGE relating to capital reduction demergers and statutory demerger conditions: At Tax Update 2026, HMRC published a consultation on ‘Modernising the distributions framework’. The consultation includes a range of proposals aimed at reducing opportunities for income tax payers to extract value from companies in the form of capital rather than income. A number of the proposals will, if implemented, affect the tax treatment of demergers, including:

• preventing the implementation of new holding company structures which facilitate the extraction of value as capital. Currently, the insertion of a new holding company above an existing group holding company results in the nominal value of the new holding company’s share capital being equal to the market value of the old holding company’s shares. A reduction in capital of the new holding company therefore represents a repayment of capital rather an income distribution. The ‘New HoldCo’ structure is an essential feature of how capital reduction demergers are currently structured. The consultation proposes that share buybacks and other returns of capital ‘reflect a “frozen” amount of capital on the shares in any future holding company at the amount subscribed

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