Demerger Tax Glossary

A demerger is the splitting of a company or group so that one or more businesses or assets end up in separate companies, usually owned by the same shareholders or divided between them. It's the opposite of a merger. In the UK it's commonly used to separate property from trade, split shareholders or prepare part of a group for sale.

In a direct demerger, a company distributes shares in its subsidiary straight to its shareholders. In an indirect demerger, the company transfers a subsidiary or a trade to a new company, which issues its own shares to the shareholders. The statutory demerger rules in sections 1076 and 1077 CTA 2010 cover each type.

Both separate businesses or assets into new companies owned by the shareholders. A capital reduction demerger uses a reduction of share capital, usually supported by a directors' solvency statement, so the company continues. A liquidation demerger uses section 110 of the Insolvency Act 1986, with a liquidator winding up the company and transferring its parts.

A partition demerger splits a group between different shareholders, so that each ends up owning a separate business on their own rather than everyone sharing everything. It's often used when shareholders want to go their separate ways. The reliefs that can apply depend on the route used and on the shareholdings matching the value each person receives.

An exempt distribution is a demerger distribution that meets the conditions in sections 1075 to 1099 of the Corporation Tax Act 2010. It isn't treated as income for the shareholders, so no income tax arises on it. The conditions include that the companies are trading and that the demerger isn't part of tax avoidance or a planned change of control.

A chargeable payment is a payment, broadly one made otherwise than for genuine commercial reasons, connected with an exempt distribution and made within five years after it, for example cash paid to a shareholder by a company involved. It's taxed as income and can't be deducted by the company paying it. Clearance can be sought in advance.

A solvency statement is a statement made by all the directors of a private company that it can pay its debts now and over the next 12 months. Under section 642 of the Companies Act 2006, it supports a reduction of share capital by special resolution without going to court, and must be made no more than 15 days before the resolution.

It means an asset moves between companies at a value that produces neither a gain nor a loss for the company transferring it, so no tax arises on the transfer. The receiving company takes over the original cost. It applies, for example, to transfers within a capital gains group and to qualifying reconstructions under section 139 TCGA 1992.

A degrouping charge can arise when a company leaves a group within six years of receiving an asset from another group company on a no gain, no loss basis. The deferred gain comes back into charge. Where the company leaves through a share disposal, the gain is usually added to the sale proceeds of the shares instead.

Stamp duty is charged on documents transferring shares, at 0.5% of the price, and stamp duty reserve tax covers agreements to transfer shares. Stamp duty land tax is charged on buying land and property in England and Northern Ireland. Scotland and Wales have their own land taxes. Demergers can involve both, and each has its own reliefs.

It's where shareholders swap their shares in a company for new shares in another company, often a new holding company inserted at the top of the group. Where the conditions in section 135 TCGA 1992 are met, the shareholders don't pay capital gains tax at that point. It's often the first step in a capital reduction demerger.

For capital gains tax, a scheme of reconstruction is defined in Schedule 5AA TCGA 1992. Broadly, new ordinary shares are issued only to the existing shareholders, in proportion to their holdings, and the business carries on in the successor companies. Many demergers are structured to meet this definition so that sections 136 and 139 can apply.

Distributable reserves are the accumulated, realised profits a company can legally pay out to shareholders, less realised losses. Some demerger steps, such as distributing shares in a subsidiary, need enough distributable reserves. If there aren't enough, a reduction of share capital can sometimes create them, which is one reason accounts figures matter early.

It's an advance clearance under section 701 of the Income Tax Act 2007 confirming that HMRC won't use the transactions in securities rules to counteract an income tax advantage. Those rules can treat what looks like a capital receipt as income. Demergers and share exchanges commonly seek this clearance alongside section 138 TCGA 1992 clearance.

A clawback period is a set time after a relief is claimed during which certain events can withdraw it. For example, SDLT group relief can be withdrawn if the buyer company leaves the group within three years, and SDLT reconstruction or acquisition relief can be withdrawn if control of the acquiring company changes within three years.

Yes. If you've come across a demerger or reorganisation term that isn't here, email taxadvisory@aswatax.co.uk and we'll consider adding it. We review the glossary when the law changes to keep the definitions accurate and in plain English. If you need a term explained urgently for your own situation, book a call and a senior adviser can talk you through what it means in practice.