Separate businesses through a section 110 reconstruction.

A liquidation demerger, often called a section 110 demerger, separates businesses by placing a company into members' voluntary liquidation. The liquidator transfers each business, or the shares in each subsidiary, to new companies, and those companies issue shares directly to the original shareholders. The old company is then dissolved. Where the conditions are met, capital gains tax reliefs mean the shareholders and the companies can often avoid an immediate tax charge.

Section 110 allows the liquidator of a company in voluntary winding up to transfer its business or property to another company and accept shares in that company as consideration, for distribution among the members. In a members' voluntary liquidation, the arrangement is sanctioned by a special resolution of the shareholders. It is the company law basis for a liquidation demerger and has been used for reconstructions for many years.

Yes. A liquidation demerger uses a members' voluntary liquidation, which is only available to a solvent company. The directors must make a statutory declaration of solvency, stating that the company will pay its debts in full, with interest, within a period of up to 12 months. If the company is insolvent, the process is a different type of liquidation with different rules, and a demerger of this kind would not normally be appropriate.

It is a formal statutory declaration by the directors under section 89 of the Insolvency Act 1986 that the company can pay its debts in full within a stated period of no more than 12 months. It must include a statement of the company's assets and liabilities and be made within the five weeks before the winding-up resolution, or on the same day before the resolution. Making it without reasonable grounds is a criminal offence.

A liquidation demerger can suit cases where the existing company is to disappear altogether, where there are several businesses to separate at once, or where the share capital and reserves make a reduction of capital difficult. Because assets pass in a winding up, distributable reserves are not needed in the same way. It can also be cleaner for certain partitions. The trade-off is the cost and formality of a liquidator, and a longer tail before dissolution.

The liquidator must be a licensed insolvency practitioner, appointed by the shareholders when they pass the winding-up resolution. The liquidator takes control of the company, carries out the section 110 transfers, deals with creditors and eventually closes the liquidation. Choosing an insolvency practitioner who regularly handles reconstructions makes the process smoother, and we work alongside them so that the transfers follow the agreed tax step plan.

Where the arrangement is a scheme of reconstruction, section 136 TCGA 1992 treats the shareholders as exchanging their old shares for the new shares in the successor companies, so no capital gain arises at that point. Their original base cost is apportioned across the new holdings. Section 137 can deny the relief where a main purpose is to avoid capital gains tax or corporation tax, which is why clearance under section 138 is usually obtained first.

Section 139 TCGA 1992 can treat the liquidator's transfer of the business to each successor company as taking place at no gain and no loss, so chargeable assets move without a corporation tax charge on the gain. The original company must receive nothing for the transfer other than the new company taking over liabilities, and residence conditions apply. Trading stock is outside section 139 and is dealt with under the normal rules.

No. Section 1030 CTA 2010 provides that a distribution in respect of share capital in a winding up is not a distribution for the purposes of the Corporation Tax Acts, so it is not a dividend. Income tax can still come into play through the transactions in securities rules, which look at whether shareholders obtain an income tax advantage. A clearance under section 701 ITA 2007 is usually included in the application to HMRC.

It is defined in Schedule 5AA TCGA 1992. Broadly, the successor companies must issue ordinary shares only to the holders of ordinary shares in the original company, shareholders of the same class must be treated equally, and the whole or substantially the whole of the original business must be carried on by the successor companies. A liquidation demerger is designed to meet these conditions so that sections 136 and 139 can apply.

Usually clearance under section 138 TCGA 1992 for the shareholders, section 139(5) TCGA 1992 for the transfer of the businesses, and section 701 ITA 2007 for transactions in securities, with section 748 CTA 2010 where a company is a shareholder. A statutory demerger clearance under section 1091 CTA 2010 is not relevant, because this route does not rely on the exempt distribution rules. The clearances are submitted together before the company goes into liquidation.

A shareholder who votes against the special resolution can serve a written notice of dissent within seven days under section 111 of the Insolvency Act 1986. They can then require the liquidator either not to carry out the arrangement or to buy their interest at an agreed or arbitrated price. In practice, liquidation demergers are planned with all shareholders in agreement, but the dissent right is something to bear in mind where relationships are strained.

Yes. When the liquidator moves companies out of the group, any company holding an asset it acquired from another group member within the previous six years may face a degrouping charge under section 179 TCGA 1992. HMRC's guidance on section 110 reconstructions flags this risk. It can sometimes be covered by the substantial shareholding exemption or managed by ordering, so the group's intra-group transfer history is checked before the route is confirmed.

The liquidator's transfers of shares or land to the successor companies are made in return for shares issued to the members, so stamp duty or SDLT can be charged unless a relief applies. Stamp duty relief under section 75 Finance Act 1986 and SDLT reconstruction relief need shareholdings to mirror. SDLT acquisition relief can cap the charge at 0.5% in some cases but needs a trading undertaking. Partitions usually do not mirror, so costs need modelling.

Once the liquidator has transferred the businesses, settled the liabilities and completed the formalities, the liquidation is closed and the company is dissolved. It no longer exists. Any contracts, licences, employees and bank accounts must have moved to the successor companies before then. This tail can take a while, but the successor companies trade normally from the date of transfer, so the shareholders do not usually need to wait for dissolution.

Where a business transfers as a going concern to a successor company, the employees usually transfer under the TUPE regulations, keeping their existing terms and continuity of employment. Information and consultation duties may apply. This is an employment law matter for your lawyers, but it affects the timetable and should be planned in. For tax, the payroll and PAYE arrangements for the new employer will also need to be set up before the transfer date.