Demerger using a Companies Act reconstruction

By Tolley
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The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Demerger using a Companies Act reconstruction
  • Tax analysis ― transferor company
  • Tax analysis ― shareholders
  • Clearance applications

In certain circumstances, a demerger by way of a Companies Act reconstruction may be suitable, ie if the company does not have sufficient distributable reserves for an exempt demerger.

Under CA 2006, Part 26, a company can, with court approval, make a compromise or arrangement with its shareholders or creditors. In the context of a demerger, this would involve a reduction in the company’s share capital. In return, shareholder rights to a return of capital are reduced by the transfer of a business or shareholding to a new company.

The tax consequences are similar to those applicable to a demerger via a liquidation because the definition of ‘Scheme of Reconstruction’ in TCGA 1992, Sch 5AA includes a reconstruction under CA 2006, Part 26. The availability of CGT reconstruction reliefs in TCGA 1992, ss 136 and 139 should give a tax-efficient result. However, there are potential tax liabilities under this route, particularly stamp duty and / or stamp duty land tax (SDLT). The main difference in the tax analysis relates to the position of the shareholders which is discussed below.

For guidance on demergers via a liquidation, see the Demerger via a liquidation ― overview guidance note.

For overall guidance on demergers, including choice of the most appropriate route and planning the demerger project, see the Demergers ― overview guidance note.

Tax analysis ― transferor company
Corporate gains

It should be possible for the original company to obtain relief from tax on the distribution of the business by virtue of the provisions for relief from tax on corporate gains on reconstructions in TCGA 1992, s 139.

Section 139 relief is available in respect of a ‘Scheme of reconstruction’ which is defined in TCGA 1992, Sch 5AA. Usually, a Companies Act reconstruction should satisfy the conditions but this should be confirmed for each scenario. The main

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