Statutory demergers - introduction

By Tolley
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The following Owner-Managed Businesses 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

A group may have grown without much planning and a point may be reached where it is thought that the group could be run more efficiently by separating out various parts. There are several ways in which this can be achieved in a tax efficient manner. Statutory demergers enable businesses to demerge without having to liquidate the original company.

If the conditions for a statutory demerger are met, the distribution of assets to shareholders is an 'exempt distribution'. Other tax reliefs should reduce or remove other potential tax liabilities. Three types of statutory demerger are permitted by the legislation:

Types of statutory demerger
Type 1 - 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

The shareholders receive shares in the subsidiaries in exchange for their shares in the original holding company by way of a share for share exchange.

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 the new companies set up by shareholders instead of the shares. Again, consideration is in the form of shares in the new companies.

CTA 2010, s 1077

This may be illustrated as follows:

For guidance on the tax consequences of a Type 2 Demerger see the Type 2 and

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