I5.1006 Distributions received by trustees on a demerger—income tax
A demerger is a series of transactions which have the effect and purpose of dividing the trading activities carried on by a single company or group of companies between two or more companies or groups of companies1.
A demerger takes place when company (A) transfers part of its business to its 75% subsidiary (B) and declares a dividend to its shareholders.
The demerger may be either:
• a direct demerger2, where A transfers some of the shares in B to its shareholders to satisfy the dividend, or
• an indirect demerger3, where A transfers either the trade or the shares in B to a separate company (C) in exchange for C shares being issued A's shareholders to satisfy the dividend
Where certain conditions are satisfied the recipient of the shares:
• is not treated as receiving an income distribution (ie it is an exempt distribution) so it is not subject to income tax4, and
• is not treated as having received a capital distribution5 so there is no immediate charge to CGT
For the CGT treatment of a distribution received on a demerger see I5.1024.
Treatment of distributions received by trustees on demerger
From 1 October 2013, unless trust documents indicate to the contrary, the receipt of a tax-exempt corporate distribution6 by a trustee on a demerger is, in England and Wales, always treated as a receipt of
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