Split a company or group without an unexpected tax bill.

A demerger splits one company or group into two or more separate companies, usually owned by the same shareholders, or by different shareholders in a partition. It is used to separate a trading business from property, to split two trades, or to let shareholders go their own way. Done properly, a demerger can often be carried out without immediate capital gains tax, corporation tax or income tax, but only where the conditions of the reliefs are met and the route suits the facts.

The most common reasons are separating valuable property from the risks of a trading business, preparing one part of a group for sale while keeping the rest, letting shareholders who disagree take different businesses, and passing different parts of the business to different family members. Lenders and investors also sometimes prefer a cleaner structure. HMRC expects a genuine commercial reason, so the reason for the demerger should be clear and written down from the start.

It can often be tax neutral, which means no tax is paid at the time of the demerger and gains are deferred into the new shares. That depends on several reliefs applying together, each with its own conditions and anti-avoidance rules, for capital gains tax, corporation tax, income tax, stamp duty and stamp duty land tax. A badly ordered step can lose a relief, so the route and sequence are planned before anything is signed, and HMRC clearance is usually obtained first.

There are four main routes. A statutory demerger uses the exempt distribution rules in the Corporation Tax Act 2010 and only suits trading businesses. A capital reduction demerger uses a reduction of share capital under the Companies Act 2006. A liquidation demerger uses section 110 of the Insolvency Act 1986. A partition is any of these used so that different shareholders end up owning different businesses. Many demergers start by inserting a new holding company.

Usually a capital reduction demerger or a liquidation demerger. A statutory demerger is only available where the businesses involved are trading, and the legislation excludes dealing in land and holding investments from what counts as a trade, so a property investment business normally cannot be separated that way. The choice between the other two routes depends on reserves, lenders, the shareholders' plans and the stamp duty and SDLT position.

Most private company demergers take a few months from first call to completion. The timetable is driven by the facts we need to gather, valuations, the HMRC clearance application and the legal documents. HMRC must reply to statutory clearance applications within 30 days of receiving a complete application, and further questions can extend that. A liquidation demerger can take longer at the end, because the liquidator has to finish the winding up before the old company is dissolved.

Clearance is not compulsory, but for almost every demerger it is sensible. Several reliefs have a main purpose or commercial reasons test, and clearance gives advance confirmation that HMRC accepts the demerger is commercially driven rather than tax driven. The usual applications are under section 1091 CTA 2010 for statutory demergers, sections 138 and 139(5) TCGA 1992, and section 701 ITA 2007. They can be made together in one application to HMRC's clearance team.

Sometimes, but this is where demergers most often go wrong. A statutory demerger is not available if a main purpose is a sale of a trade or a change of control after the distribution, and other routes have anti-avoidance rules that look at arrangements already in place. Stamp duty and SDLT reliefs can also be refused or clawed back. If a sale is planned or likely, tell your adviser at the outset so the demerger and the sale are designed together.

In a sale, a buyer pays for the shares or assets, and tax is normally due on any gain. In a demerger, the business is separated but stays with the existing shareholders, who receive shares in the new company instead of cash. Because no cash leaves the structure, reliefs can often defer the tax. Demergers are often done before a sale, so the business being sold is cleanly separated from the part the owners want to keep.

Usually a tax adviser to design the route and obtain clearances, a corporate lawyer to draft the resolutions, share documents and transfers, and your accountant to prepare the accounts, reserves figures and valuations. A licensed insolvency practitioner is needed for a liquidation demerger, and a conveyancer where land moves. Lenders and landlords may need to consent. We coordinate with your existing advisers and give them a clear step plan, rather than replacing them.

Not usually, where the route qualifies. For a statutory demerger the new shares are treated as a reorganisation of the shareholders' existing holding. For capital reduction and liquidation demergers, section 136 TCGA 1992 treats the new shares as standing in the shoes of the old ones, provided the scheme meets the definition of a reconstruction and the anti-avoidance rule does not apply. The base cost is then split between the holdings.

It can. If a company leaves a group holding an asset it acquired from another group member within the previous six years, a degrouping charge under section 179 TCGA 1992 may arise. A statutory exempt distribution switches this rule off where the company leaves only because of the distribution. In other routes the charge can sometimes be covered by the substantial shareholding exemption or avoided by careful ordering, which is why the group's history of intra-group transfers is checked early.

It can be, at 0.5% on shares transferred for consideration, unless a relief applies. Share exchanges can qualify for relief under section 77 Finance Act 1986, and transfers of an undertaking for shares under section 75, but both have conditions, including that shareholdings mirror one another and, for section 77, that there are no disqualifying arrangements for a change of control. Partitions are the area where stamp duty is most likely to be a real cost.

It can be. Where land or buildings move between companies, SDLT is charged unless a relief applies. Group relief, reconstruction relief and acquisition relief in Schedule 7 Finance Act 2003 may help, but each has conditions and can be withdrawn if, for example, the purchaser leaves the group or control changes within three years. Property often moves to a new company in a demerger, so the SDLT position needs to be worked out before the route is chosen.

Yes. A partition demerger can split a family company so that different family members or branches end up owning different businesses. This is often done alongside succession planning, and the inheritance tax position of each shareholder should be reviewed at the same time, because business relief depends on what each new company does. The capital gains tax reliefs require the shares to be issued on a fair, class-by-class basis, which shapes how the split is designed.

To begin, we need a group structure chart, the latest accounts for each company, the shareholders and their holdings, what is to be separated and who should own it afterwards, and the reason for the demerger. It also helps to know about any property, bank borrowing, intra-group transfers in the last six years and any plans to sell. From that we can tell you which routes are realistic and what the key tax risks are.

It depends on the route. A statutory demerger is a distribution, so the distributing company normally needs sufficient distributable reserves under company law. A capital reduction demerger creates a reserve by reducing share capital, which a private company can do using a directors' solvency statement. A liquidation demerger distributes assets in a winding up, so the usual dividend rules do not apply in the same way. Your accountant and lawyer will confirm the company law position on the actual figures.

It can. Business asset disposal relief on a later share sale has conditions that must be met for the two years before the sale, including the company being a trading company or holding company of a trading group and the shareholder holding at least 5%. Shares received in a qualifying reorganisation can generally carry over the holding period, but whether the new company meets the trading test depends on what it holds after the demerger. We review this before the route is chosen.

Not easily. Once shares have been cancelled, assets transferred and new companies registered, undoing the demerger would usually be a new transaction with its own tax consequences. Some reliefs also have clawback periods of several years. That is why the planning stage matters so much: the route, the reasons, the clearances and the future plans for each company are settled before the documents are signed, rather than corrected afterwards.

Lenders usually need to consent, because a demerger moves assets or shares that may be security for borrowing. Facilities may need to be split, refinanced or released, and cross-guarantees between group companies are often unwound. Lender requirements can affect the route, for example where a solvency statement or liquidation is involved. We recommend speaking to your bank early, and we can explain the proposed structure to them in plain terms.

We review the group and the objectives, compare the realistic routes, explain the tax position for the companies and shareholders, and recommend one. We then prepare the HMRC clearance applications, give the lawyers and accountants a step plan, review the documents for tax, and deal with stamp duty and SDLT filings and returns. Our advice is led by a Chartered Tax Adviser, and we stay involved until the last step is completed.

Usually yes, but the tax analysis is more involved. Non-UK resident shareholders may be taxed in their country of residence, and the UK can tax non-residents on disposals of interests in UK property-rich companies. Some UK reliefs also have residence conditions at company level, such as the statutory demerger requirement that each relevant company is UK resident or resident in a member State. Overseas shareholders should take local advice alongside ours.