Statutory demergers - introduction

By Tolley

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

  • Statutory demergers - introduction
  • Types of statutory demerger
  • Conditions for a statutory demerger
  • Chargeable payments
  • Clearance and reporting procedures
  • HMRC guidance

This document discusses the capital gains tax implications where shares are sold in exchange for new shares, together with the takeovers involving cash; different classes of shares; and interaction with entrepreneurs’ relief.


This guidance note gives an overview of the steps and tax implications of a statutory demerger. For an overall introduction to demergers, see the Demergers - overview guidance note.

Where the qualifying conditions are met, statutory demergers enable businesses to demerge in a tax efficient manner without having to liquidate the original company as in a liquidation demerger. In a statutory demerger, the distribution of assets to shareholders is an 'exempt distribution'. Other tax reliefs should reduce or remove other potential tax liabilities. Particular care must be taken where a statutory demerger has been effected that reliefs are not withdrawn as a result of any chargeable payments in the five years following the demerger. This is considered in more detail below.

Three types of statutory demerger are permitted by the legislation:

Types of statutory demerger
Type I - Direct demerger

In a 'Type 1' demerger, separate groups of shareholders acquire shares in separate 75% subsidiaries from the original holding company. It is permitted for all or any of the shareholders to acquire shares in this way.

CTA 2010, s 1076

A simple illustration of a Type 1 demerger is as follows:

The following is a diagram of a direct demerger of two trading subsidiaries to different shareholders:

For guidance on the tax consequences of a Type 1 Demerger see the Type 1 (direct) statutory demerger guidance note.

Type 2 - indirect demerger – trades transferred

A 'Type 2' indirect demerger involves the transfer of 75% trading subsidiaries’ trades to new companies. Consideration is in the form of shares in the new companies issued to the shareholders of the issuing company.

CTA 2010, s 1077

This may be illustrated as follows:

For guidance on the tax consequences of a Type 2

More on Demergers: