Capital reduction demerger ― overview

Produced by Tolley

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

  • Capital reduction demerger ― overview
  • Process involved in a capital reduction demerger
  • Company law procedure for carrying out a reduction of share capital
  • Overview of steps in a capital reduction demerger
  • Illustration of a typical capital reduction demerger
  • Starting structure
  • Step one: insert a new holding company
  • Step two: transfer demerged subsidiary to New HoldCo
  • Step three: capital reduction of New HoldCo

Capital reduction demerger ― overview

The stringent conditions for a statutory demerger and the chargeable payments rule can often make that demerger route unfeasible or undesirable.

Common scenarios where the statutory demerger route may not be suitable or indeed available include where:

  1. the company does not have sufficient distributable reserves

  2. there are plans to sell the demerged business or businesses

  3. the business that is being demerged is not a trading business

In such cases, there are two alternative non-statutory procedures for carrying out the demerger. One is set out in Insolvency Act 1986, s 110, and is often referred to as a ‘s 110 demerger’ or ‘liquidation demerger’. The second is through a reduction in the company’s share capital, known as a demerger by way of a Companies Act reconstruction or a ‘capital reduction demerger’. This guidance note provides an introduction to capital reduction demergers.

Capital reduction demergers have become increasingly popular for unlisted groups as private companies can reduce their share capital without court approval. A capital reduction demerger also avoids some of the problems of liquidation demergers, such as the need to appoint a liquidator and the commercial and reputational issues associated with putting a company into liquidation. An overview of the capital reduction demerger process and the typical steps involved are shown below. For the tax analysis of this type of demerger, see Capital reduction demerger ― tax analysis.

Advance HMRC clearance should be sought as part of the demerger process to obtain HMRC’s agreement that the proposed transactions are being carried out for bona fide commercial purposes and not for the avoidance of tax. Appropriate time should be built into the transaction timetable for this. For more on clearances, see the Demerger clearances guidance note.

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 ―

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