Demerger via liquidation ― tax analysis

Produced by Tolley

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

  • Demerger via liquidation ― tax analysis
  • Tax analysis of a liquidation 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 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. 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 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 liquidation demerger ― overview

There is more than one method for carrying out a liquidation demerger. However, the typical steps for carrying out a liquidation 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 liquidation demerger, see the Demerger via a liquidation ― 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 (Liquidation HoldCo) above the current holding company by way of a share for share exchange or (for public companies) via a court-approved scheme of arrangementProvided HMRC accepts that the share exchange is driven by commercial reasons (confirmed by a TCGA 1992, s 138 tax clearance), the shareholders will not trigger any capital gain on the sale of their shares in the target companyThe new holding company should qualify for relief from stamp duty under FA 1986, s 77 provided the shareholdings in Liquidation HoldCo after the transaction mirror those in the target company before the transaction. Relief from stamp duty will need to be applied for by Liquidation HoldCo
2The target company then transfers the shares in

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