Demergers ― overview

Produced by Tolley
Demergers ― overview

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

  • Demergers ― overview
  • Reasons for demergers
  • Choice of demerger route
  • What is a tax efficient demerger?
  • Choosing the optimum demerger route
  • Summary of guidance notes
  • Planning a demerger project
  • Company law
  • Risk

In simple terms, a demerger involves the separation of a company’s business into two or more parts, typically carried on by successor companies under the same ownership as the original company.

There are many reasons why a company demerger may be desirable. For example, a demerger could be undertaken with a view to focusing management on one specific part of the business. Alternatively, a demerger might be carried out to ring-fence liabilities attached to a particular business, or as a precursor to the disposal of a business.

While demergers are usually triggered by a variety of commercial reasons, a business undergoing a demerger will also want to minimise, and ideally eliminate, any tax charges arising on the demerger. The different mechanisms for achieving a tax efficient demerger fall into three main categories:

  1. the statutory route ― this involves a transfer by a company of shares in a subsidiary or of business assets either directly or indirectly to the distributing company’s shareholders via a dividend in specie

  2. a reduction in the company's share capital ― this is often referred to as a ‘capital reduction demerger’ and involves a reduction of part of the share capital of the target group and cancellation of those shares. This cancelled share capital is returned to the shareholders by transferring the business to be demerged to a new company which it in turn issues shares to those original shareholders

  3. a liquidation under Insolvency Act 1986, s 110 ― this is also known as a ‘liquidation demerger’ and involving the distribution of shares or assets of a company to new successor companies as part of a liquidation process

The decision as to which demerger mechanism to use will vary and be dependent on the specific facts and requirements of each transaction.

For example, the statutory demerger route cannot apply to non-trading businesses or when arrangements are in place at the time of the demerger to sell the demerged or successor company. In such circumstances,

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