Demergers - overview

By Tolley

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

  • Demergers - overview
  • Reasons for demergers
  • Choice of demerger route
  • Planning a demerger project

This guidance note gives an overview of why and how companies and groups demerge, and the aims and process of tax planning for demergers.

There are many reasons why a company demerger may be desirable and there are several different ways to achieve a demerger. A demerger should be carefully structured so as to be as tax efficient as possible whilst still achieving the commercial goals. Tax planning in relation to demergers should be undertaken carefully so as to avoid putting the company and its advisers at unnecessary risk.

There is no single solution to achieving a tax-efficient demerger and so each scenario must be considered on its own facts and requirements.

Reasons for demergers

The aim of a demerger must be clearly ascertained in order to determine the ideal route. There are many reasons why a company or group might demerge, including the following:

  • to separate out a 'distressed' part of the business in order to liquidate
  • to separate out a part of the business earmarked for sale
  • for legal reasons, for example to protect part of the business from legal challenge or claims
  • family members may want to operate different parts of the business independently
  • for the company or shareholders to qualify for certain tax reliefs, for example Business Property Relief (see the BPR guidance note (subscription sensitive)), Entrepreneur's relief (see the Conditions for entrepreneurs’ relief guidance note) or Substantial Shareholdings Exemption (see the Overview of the substantial shareholding exemption guidance note)
Choice of demerger route

As mentioned above, there is no single relief from all relevant taxes on a demerger although there are several different tax reliefs which in combination may give a tax efficient result. Tax planning must therefore

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