Corporation Tax

Demerger via a liquidation ― overview

Produced by Tolley
  • 23 Mar 2022 10:55

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

  • Demerger via a liquidation ― overview
  • Process involved in a liquidation demerger
  • Illustration of a typical demerger via a liquidation
  • Starting structure
  • Step one: insert a new holding company
  • Step two: transfer Business Y to Liquidation HoldCo
  • Step three: liquidation of Liquidation HoldCo
  • Final structure

Demerger via a liquidation ― overview

In certain circumstances, the statutory demerger route may not be available. For example:

  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 liquidation demergers.

Broadly, this involves the company that is to be demerged being put into liquidation and then its assets distributed to new companies set up by the shareholders. This procedure may be used to transfer either shares in a subsidiary or trade and assets to different shareholders. In terms of non-statutory demerger options, liquidation demergers are less popular than capital reduction demergers due to the practical and perceived effects on the group’s reputation and ongoing business of being placed into liquidation and also the relatively straightforward company law procedure for carrying out a reduction of share capital for private companies with a capital reduction demerger. There is also the additional cost of appointing a liquidator and having to carry out a formal liquidation process.

However, liquidation demergers are still used in some

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