Let shareholders go their separate ways, each with their own business.

A partition demerger splits a company or group so that different shareholders end up owning different businesses. For example, two shareholders who each own half of a company running two businesses could each walk away owning one business outright. It is usually carried out as a capital reduction demerger or a liquidation demerger. Where the conditions are met, capital gains tax can often be deferred, but stamp taxes and valuations need particular care.

In an ordinary, pro rata demerger, every shareholder owns the same percentage of each company afterwards. In a partition, the shareholders separate, with each person or family owning a different company. That difference matters for tax: several reliefs for stamp duty and SDLT require shareholdings to mirror, and partitions do not. The business split also has to be fair in value, or one shareholder could be treated as making a gift to the other.

Often, yes. HMRC's guidance confirms that a business can be divided and transferred to companies that issue shares to different groups of shareholders, and still be a scheme of reconstruction. Section 136 TCGA 1992 can then treat each shareholder's new shares as replacing their old ones, and section 139 can treat the business transfers as no gain, no loss. The anti-avoidance rule in section 137 applies, so HMRC clearance is normally obtained first.

The reconstruction rules in Schedule 5AA TCGA 1992 require shareholders of the same class to be treated equally when new shares are issued. In a partition, different shareholders are meant to receive different companies, so the share capital is first reorganised into separate classes, one for each business. Paragraph 6 of Schedule 5AA allows the conditions to be tested after a reorganisation carried out for the scheme, which is what makes this work.

A partition must meet the definition of a scheme of reconstruction. The successor companies must issue ordinary shares only to holders of ordinary shares in the original company; shareholders of each class must have the same entitlement to new shares as others in that class; and the whole or substantially the whole of the original business must be carried on by the successor companies, or the scheme must be a court-approved compromise or arrangement.

Often, yes. Stamp duty relief under section 75 Finance Act 1986 needs each shareholder to hold the same proportions in both companies, which a partition does not achieve. HMRC's guidance gives partition examples where relief is denied on the transfer to the new company. Relief under section 77 for an initial share exchange may also be lost if the arrangements give particular persons control. Stamp duty at 0.5% should therefore be budgeted for.

It can. For instruments executed from 22 July 2020, section 77A Finance Act 1986 excludes a person who held at least 25% of the target company's shares throughout the three years before the share exchange when testing for disqualifying arrangements. That can preserve relief on the holding company insertion where one long-standing shareholder takes control of it. HMRC's examples show it does not help where several smaller holders together take control.

It can be. If land moves to a company owned by different shareholders, SDLT reconstruction relief is not available because shareholdings do not mirror. Acquisition relief can limit SDLT to 0.5% of the consideration, but only where the undertaking transferred is mainly a trade that is not dealing in land. Where a property company itself moves as a subsidiary, its shares move instead of the land. The structure can make a large difference to SDLT.

Each shareholder gives up an interest in the whole company and receives one business. If the values do not match their percentage holdings, value passes from one shareholder to another. That can be a gift for capital gains tax and inheritance tax purposes, and it can undermine HMRC clearance. Independent valuations of each business are usually obtained, and any imbalance is often corrected with a balancing adjustment that itself needs tax advice.

Sometimes, but cash is a problem. The reconstruction reliefs depend on shareholders receiving shares, so cash paid to a shareholder may be taxed, and some stamp duty and SDLT reliefs restrict non-share consideration. Balancing is often better done by moving assets or liabilities between the businesses before the split, so that each business carries the right value. The method should be agreed with your tax adviser before heads of terms are signed.

Both can work. A capital reduction partition avoids a liquidator and keeps one company alive, while a section 110 liquidation partition can suit cases where the original company should disappear or several businesses are separating at once. HMRC's partition examples use a section 110 liquidation, and its stamp duty examples use capital reductions. We compare company law, reserves, stamp taxes and future plans before recommending one.

In limited cases. A direct statutory demerger can transfer subsidiary shares to all or any of the members, so it is not limited to pro rata distributions. But it only works for trading businesses, and it fails if a main purpose is a change of control or sale afterwards. Because partitions often involve property or shareholders with different plans, a capital reduction or liquidation route is used more often.

It is strongly advisable. A partition involves shareholders swapping an interest in a shared company for full ownership of one business, which HMRC looks at closely. Clearance under sections 138 and 139(5) TCGA 1992 and under section 701 ITA 2007 is normally sought before any steps are taken. A clear explanation of why the shareholders are separating is central to the application, and HMRC must reply within 30 days of a complete application.

A sale soon after a partition can put the reliefs at risk. HMRC will want to know whether the sale was planned when the partition took place, and the anti-avoidance rules look at arrangements in place at the time. SDLT reliefs can also be withdrawn if control of the acquiring company changes within three years. If one shareholder intends to sell their business, say so at the start, so the plan and the clearance reflect it.

Each business normally takes its own liabilities, and shared borrowing has to be split, refinanced or repaid. Lenders usually need to consent and may require new security. Moving debt between companies can affect values and therefore the fairness of the split, and some liability transfers count as consideration for stamp tax purposes. The liabilities plan is settled alongside the valuations and the tax steps.

Yes. Families often use a partition so that different branches each own and run their own company, reducing future disputes. The capital gains tax reliefs can apply in the same way as for unrelated shareholders, but connected persons rules, gifts of value and inheritance tax need extra attention, particularly business relief, which depends on what each new company does. Succession planning and the partition are best designed together.