Capital reduction demerger ― tax analysis

Produced by Tolley
Capital reduction demerger ― tax analysis

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

  • Capital reduction demerger ― tax analysis
  • Tax analysis of a capital reduction demerger ― overview
  • Step 1 ― tax issues at shareholder level
  • Capital gains
  • Step 1 ― tax issues at corporate level
  • Stamp duty
  • Step 2 ― tax issues at corporate level
  • Corporate gains
  • Stamp duty
  • VAT
  • More...

This guidance note follows on from the Capital reduction demerger ― overview guidance note which gives an introduction to capital reduction demergers and includes diagrams to illustrate a typical demerger via that route.

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. HMRC clearances will be required if this demerger route is chosen and appropriate time should be built into the transactions process for these. For more information, 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 ― overview guidance note.

Tax analysis of a capital reduction demerger ― overview

There is more than one method for carrying out a capital reduction demerger. However, the typical steps for carrying out a capital reduction demerger are shown below. Depending on the steps involved, tax charges can be triggered either at the corporate or shareholder level (or both). For a more detailed description of the steps involved in a capital reduction demerger, see the Capital reduction demerger ― overview guidance note.

A high level overview of the steps and related tax implications are as follows:

StepDescription of stepTax implications ― shareholder levelTax implications ― corporate level
1Insert a new holding company (HoldCo) above the target company by way of a share for share exchangeProvided HMRC accepts that the

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