Separate trading businesses using the exempt distribution rules.

A statutory demerger uses special rules in Part 23, Chapter 5 of the Corporation Tax Act 2010 (sections 1073 to 1099) to separate trading businesses. A distribution that meets the conditions is an exempt distribution, so shareholders are not taxed on it as income. Capital gains tax rules then treat the shareholders' new holding as a reorganisation. It is a well-established route, but it is limited to trading activities and has strict anti-avoidance conditions.

In a direct demerger under section 1076, the company hands shares in a 75% subsidiary straight to its shareholders. In an indirect demerger under section 1077, the company transfers a trade, or shares in a 75% subsidiary, to a new company, and that new company issues its shares to the original company's shareholders. Indirect demergers have extra conditions about the new company and need capital gains relief at company level as well.

Generally no. The statutory demerger rules are about trading companies and trading groups, and for these purposes trade does not include dealing in shares, securities or land. Letting property is an investment activity rather than a trade. Where the aim is to separate a property investment business from a trading business, a capital reduction demerger or a liquidation demerger is normally used instead, as those routes are not limited to trades.

Section 1081 sets general conditions. Each relevant company must be UK resident or resident in a member State. The distributing company must be a trading company or member of a trading group, and any subsidiary transferred must be trading or the holding company of a trading group. The distribution must be made wholly or mainly to benefit the trading activities, and it must not form part of a scheme with certain prohibited main purposes.

Under section 1081(5), the distribution must not be part of a scheme or arrangement whose main purpose, or one of whose main purposes, is avoiding tax, making a chargeable payment, the acquisition of control of a relevant company or group company by anyone other than members of the distributing company, or the cessation or sale of a trade after the distribution. Plans to sell one of the businesses after the demerger are therefore a central concern.

This is risky. A statutory demerger fails if a main purpose of the arrangements is the sale of a trade, or third parties acquiring control, after the distribution. If a sale is already in contemplation, the exempt distribution may not be available. A later sale that was not planned at the time is different, but chargeable payments within five years are still taxed. If a sale is likely, another route or timing may be better, and we look at that first.

A chargeable payment is broadly a payment, other than a normal commercial one, made by a company involved in the demerger to its shareholders in connection with their shares, where the payment is not for genuine commercial reasons or forms part of a tax avoidance scheme. Under section 1086 CTA 2010, a chargeable payment made within five years after an exempt distribution is taxed as income and cannot be deducted by the company.

The payment is charged to income tax or corporation tax on income in the hands of the recipient, and the company paying it cannot deduct it in working out its profits. The company may also have reporting obligations to HMRC. Advance clearance under section 1092 CTA 2010 can confirm that a proposed payment is not a chargeable payment, which is useful where shareholders expect to take payments out within the five-year period.

Section 1091 CTA 2010 lets a company ask HMRC in advance to confirm that a proposed distribution will be an exempt distribution. HMRC must give its decision within 30 days of receiving the application, or of receiving further information it asks for. If HMRC refuses, the company can ask for the matter to be referred to the tribunal. Clearance applies only to the facts disclosed, so full and accurate disclosure is essential.

Yes. Under section 1095 CTA 2010, a company that makes an exempt distribution must make a return to HMRC within 30 days, giving details of the distribution and why it is exempt. Where clearance was obtained, the return largely confirms this. Further returns may be needed if chargeable payments are made within the following five years. These filings are easy to overlook after completion, so we include them in the step plan.

Normally not at the time. Section 192 TCGA 1992 provides that an exempt distribution is not a capital distribution, and the reorganisation rules apply as if the shareholders' original shares and the new shares were one holding. The base cost is apportioned between them. For an indirect demerger, section 136 TCGA 1992 provides similar treatment for the shares issued by the new company, subject to the anti-avoidance rule in section 137.

Not where the company leaves the group only because of the exempt distribution. Section 192(3) TCGA 1992 switches off the section 179 degrouping charge in that case. This is a real advantage over other routes. However, the protection is narrow: if the company leaves for another reason as well, or a later step causes it to leave, a degrouping charge could still arise, so the full sequence of steps needs to be checked.

Yes. A statutory demerger is a distribution by the company, so under company law it normally needs enough distributable reserves to cover it, broadly by reference to the book value of what is distributed. A company with little in the way of reserves may need to look at a capital reduction demerger instead. Your accountant confirms the figures from the relevant accounts, and your lawyer confirms the company law requirements.

Only if the conditions are met for each company involved. The distributing company must be a trading company or a member of a trading group, and a subsidiary whose shares are distributed must be a trading company or the holding company of a trading group. A subsidiary that mainly holds investments would not meet that condition, and the distributing company must also generally remain trading afterwards, so a different route is usually needed.

The legislation allows a direct demerger to transfer subsidiary shares to all or any of the members, so some statutory demergers can give different shareholders different businesses. However, the conditions about the purpose of the distribution and the acquisition of control still apply, and valuations and stamp duty need care. Whether this works depends heavily on the facts, and partitions are more often done using a capital reduction or liquidation demerger.

A 75% subsidiary is broadly a company in which another company owns at least 75% of the ordinary share capital, directly or indirectly. The demerger rules add further tests about entitlement to profits and assets. In a direct demerger, the distributing company must transfer the whole or substantially the whole of its holding, and its voting rights, in the subsidiary. Minority shareholdings below 75% cannot be demerged this way.