Statutory demergers - introduction | Tax Guidance

Statutory demergers - introduction

By Tolley

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

Statutory demergers - introduction
Types of statutory demerger
Conditions for a statutory demerger
Chargeable payments
Clearance and reporting procedures
HMRC guidance

This document discusses the capital gains tax implications where shares are sold in exchange for new shares, together with the takeovers involving cash; different classes of shares; and interaction with entrepreneurs’ relief.

This guidance note gives an overview of the steps and tax implications of a statutory demerger. For an overall introduction to demergers, see the Demergers - overview guidance note.

Where the qualifying conditions are met, statutory demergers enable businesses to demerge in a tax efficient manner without having to liquidate the original company as in a liquidation demerger. In a statutory demerger, the distribution of assets to shareholders is an 'exempt distribution'. Other tax reliefs should reduce or remove other potential tax liabilities. Particular care must be taken where a statutory demerger has been effected that reliefs are not withdrawn as a result of any chargeable payments in the five years following the demerger. This is considered in more detail below.

Three types of statutory demerger are permitted by the legislation:

Types of statutory demerger

Type I - Direct demerger

In a 'Type 1' demerger, separate groups of shareholders acquire shares in separate 75% subsidiaries from the original holding company. It is permitted for all or any of the shareholders to acquire shares in this way.

CTA 2010, s 1076

A simple illustration of a Type 1 demerger is as follows:

The following is a diagram of a direct demerger of two trading subsidiaries to different shareholders:

For guidance on the tax consequences of a Type 1 Demerger see the Type 1 (direct) statutory demerger guidance note.

Type 2 - indirect demerger – trades transferred

A 'Type 2' indirect demerger involves the transfer of 75% trading subsidiaries’ trades to new companies. Consideration is in the form of shares in the new companies issued to the shareholders of the issuing company.

CTA 2010, s 1077

This may be illustrated as follows:

For guidance on the tax consequences of a Type 2