Demerger via liquidation ― tax analysis

By Tolley

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

  • Demerger via liquidation ― tax analysis
  • Tax analysis ― original company
  • Tax analysis ― shareholders
  • Clearance applications

This guidance note follows on from the Demerger via a liquidation ― overview guidance note which gives an introduction to demergers via liquidations (also known as non-statutory demergers, or s 110 demergers) and includes diagrams to illustrate a typical demerger via liquidation.

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 ― original company
Corporate gains

It should be possible for the original company to obtain relief from tax on the distribution of the business by virtue of the provisions for relief from tax on corporate gains on reconstructions in TCGA 1992, s 139.

Section 139 relief is available in respect of a ‘Scheme of reconstruction’ which is defined in TCGA 1992, Sch 5AA. Usually a non-statutory demerger should meet this definition but this should be confirmed for each scenario. The main conditions for s 139 relief to apply to a Scheme of reconstruction are:

  • all or part of a company’s business is transferred to another company
  • the Scheme is undertaken for bona fide commercial purposes and not for the purpose of avoidance of corporation tax, capital gains tax or income tax
  • the transferor and transferee companies must be UK resident
  • the only consideration which is allowed to be received by the transferor is the assumption of its liabilities by the transferee companies. With effect from 19 July 2011, this condition is not breached solely as a result of the allocation of degrouping charges to companies which dispose of shares. (TCGA 1992, s 139(1B))

Provided s 139 relief is available, the transfer is at no gain, no loss. The transferee company receives the assets at cost (or

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