Corporation Tax

Statutory demergers ― introduction

Produced by Tolley
  • 23 Mar 2022 11:03

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

  • Statutory demergers ― introduction
  • Types of statutory demerger
  • Choosing between a direct or indirect statutory demerger
  • Type I ― Direct demerger
  • Type 2 ― indirect demerger ― trades transferred
  • Type 3 ― indirect demerger ― shares transferred
  • Conditions for a statutory demerger
  • Chargeable payments
  • Clearance and reporting procedures
  • HMRC guidance
  • More...

Statutory demergers ― introduction

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.

One of the key aspects when carrying out a demerger, from a tax perspective, is to mitigate or avoid any tax charge from splitting up the business or group. Statutory demergers provide businesses with a mechanism to demerge in a tax efficient manner, but because of the strict conditions that must be met the application of statutory demergers is limited. For example, the statutory demerger route cannot apply to non-trading businesses or where arrangements are in place at the time of the demerger to sell the demerged or successor company. In addition, there are rules (the chargeable payments rules) that can result in a tax charge if certain events take place within five years after a statutory demerger. In practice, these rules can make statutory demergers unattractive.

For cases where the statutory demerger route is suitable, and provided the relevant conditions are met, the demerger should not trigger charges to income tax, capital gains tax or corporation tax, either at shareholder or company level.

There are three types of statutory demerger are permitted by the legislation, which are explored in further detail below (see types 1 to 3 below).

The most common scenarios where a statutory demerger are likely to be used are where the target company:

  1. is carrying on two or more trades

  2. has two or more trading subsidiaries, or

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