Keep the demerger out of the income tax net.

Because a demerger usually involves a company passing value to its shareholders, or to a company they own, in respect of their shares. Under section 1000 CTA 2010, a distribution out of a company's assets in respect of shares is generally a distribution, unless it represents a repayment of capital or is matched by new consideration. Without the right structure, shareholders could be taxed on the value as dividend income.

For 2026/27, dividends above the £500 dividend allowance are taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band. On a demerger of a valuable business or property, that could be a very large bill on value that never reached the shareholders in cash. Avoiding an income distribution is therefore one of the first design points.

It's a distribution that qualifies under the statutory demerger rules in CTA 2010, running from section 1073. An exempt distribution is not a distribution for the purposes of the Corporation Tax Acts, and HMRC's guidance confirms it isn't income of the shareholders. It's available where trading activities are divided between companies or groups and the conditions in sections 1081 to 1085 are met.

In a direct demerger under section 1076 CTA 2010, a company transfers shares in one or more 75% subsidiaries straight to its shareholders. In an indirect demerger under section 1077, the company transfers a trade, or shares in 75% subsidiaries, to one or more other companies, often newly formed, which issue their own shares to the original company's shareholders. Each has its own additional conditions.

The main ones in section 1081 CTA 2010 are that the companies are UK or EU resident, the distributing company and the demerged subsidiaries are trading companies or in trading groups, and the distribution is made wholly or mainly to benefit the trading activities. It also mustn't be part of arrangements with a main purpose such as avoiding tax, an outsider gaining control, or a trade being sold or ceasing.

The exempt distribution rules are designed for dividing trading activities. The distributing company must be a trading company or member of a trading group, and any subsidiary demerged must be a trading company or the holding company of a trading group. Letting property is normally an investment activity rather than a trade, so a property company usually can't be demerged this way, and another route is needed.

Broadly, a payment made within five years of an exempt distribution by a company involved in it, to one of the members, in connection with their shares, that isn't made for genuine commercial reasons or forms part of a tax avoidance scheme. Normal distributions and payments within a group are excluded. A chargeable payment is taxed as income in the recipient's hands and isn't deductible for the company.

A distribution excludes any part that represents a repayment of capital on the shares. A capital reduction demerger uses this: the value passing to the new company is matched by a reduction of share capital rather than paid out of profits. Whether that works depends on how the share capital was created and the exact steps, which is a central part of designing the route.

Generally not for the shareholders' receipt itself. A distribution made in respect of share capital in a winding up is not treated as an income distribution under section 1030 CTA 2010, so it falls under the capital gains rules instead. In a section 110 liquidation demerger, shareholders usually receive shares in new companies, and the capital gains reconstruction relief can then apply where the conditions are met.

They are anti-avoidance rules in Part 13 Chapter 1 of ITA 2007. They can apply where a person is party to a transaction in securities involving a close company, receives value that represents company reserves without paying income tax on it, and a main purpose is to obtain an income tax advantage. HMRC can then counteract the advantage, typically by taxing the receipt as income.

They can, because a demerger is a transaction in securities and usually involves close companies. The rules are aimed at turning what would be dividend income into capital or tax-free value, so the risk is highest where shareholders receive cash or assets, or where a sale follows. Most demerger clearance applications include section 701 ITA 2007, so HMRC confirms in advance that it won't use these rules.

The transactions in securities rules don't apply where there is a fundamental change of ownership of the close company, broadly where the original shareholders and their associates end up with no more than 25% of the ordinary share capital, the rights to distributions and the votes. It's mainly relevant to a sale to a third party rather than to the demerger itself, where the same shareholders usually remain.

It's the clearance under the corporation tax version of the transactions in securities rules, which apply to companies obtaining a corporation tax advantage. It's relevant where a shareholder that is itself a company receives value in a demerger. Like the section 701 ITA 2007 clearance for individuals, it can be included in the same application as the other demerger clearances.

They can, but it changes the tax picture. Cash paid to shareholders is outside the share-for-share and exempt distribution reliefs, and may be taxed as a dividend, as a capital gain, or under the transactions in securities rules if it represents company reserves. It can also put other reliefs at risk. If cash needs to come out, it's usually best treated as a separate, clearly explained step.

An exempt distribution is not a distribution for corporation tax purposes, so it isn't taxed as such. But separate corporation tax points can still arise, such as gains on assets or shares transferred, degrouping charges and the treatment of any intra-group balances. These are covered by other reliefs where the conditions are met, and are checked as part of the overall plan.

By obtaining HMRC clearance before any step. For a statutory demerger, a section 1091 CTA 2010 clearance confirms that the distribution will be exempt. A section 701 ITA 2007 clearance confirms that the transactions in securities rules won't be applied. These are combined with the capital gains clearances in a single application, and HMRC should respond within 30 days of a complete application.