HMRC clearances
What HMRC looks for in a demerger clearance
HMRC clearance gives certainty before a demerger. What HMRC needs to see, why commercial reasons matter, and the issues that most often prompt questions.
For most UK private company demergers, the first formal step is not a board meeting or a legal document. It's an application to HMRC for clearance. Clearance gives certainty that HMRC accepts, on the facts presented, that the transaction is not caught by specific anti-avoidance rules.
This article explains, at a high level, what HMRC needs to see and why applications prompt questions. It isn't a drafting guide. How an application is put together, and how questions are answered, depends on the facts.
What clearance is, and what it isn't
A clearance is HMRC's confirmation that a particular statutory test is met for a described transaction. For demergers the common ones are:
| Clearance | What it covers |
|---|---|
| s1091 CTA 2010 | Whether a distribution will be an exempt distribution under the statutory demerger rules |
| s138 TCGA 1992 | The anti-avoidance rule in s137, for share exchanges and schemes of reconstruction |
| s139(5) TCGA 1992 | The anti-avoidance rule for the company transferring its business in a reconstruction |
| s701 ITA 2007 | The transactions in securities rules for shareholders |
| s748 CTA 2010 | The transactions in securities rules for companies |
These can usually be requested in a single application sent to HMRC's clearance team. HMRC must normally respond within 30 days of receiving a complete application.
Clearance is not:
- a confirmation that every relief applies. It answers the specific question each section asks.
- cover for stamp duty or SDLT. Those reliefs are claimed separately.
- protection for a different transaction. It only covers what was described.
For a fuller overview, see our HMRC demerger clearances page.
The four things HMRC needs to see
1. A clear picture of the transaction
HMRC needs to understand every step, every company and every shareholder. That includes:
- the companies involved and their activities
- shareholdings before, during and after
- each step in order, with dates where known
- any consideration, including shares, loan notes, cash or assumed liabilities
- recent accounts
- the provisions clearance is sought under
Diagrams of the structure at each stage are standard. If HMRC has to guess how something works, it will ask.
2. Genuine commercial reasons
Most of the tests HMRC applies are about purpose. Since 26 November 2025, the capital gains rules in sections 137 and 139 TCGA 1992 ask whether a main purpose of the arrangements is to reduce or avoid tax. The statutory demerger rules ask whether the distribution is mainly to benefit trading activities, and whether it is part of a scheme with tax avoidance as a main purpose. Stamp duty and SDLT reliefs still refer to bona fide commercial reasons.
So the application needs to explain why the demerger is happening. Typical commercial reasons include:
- separating a property portfolio from the risks of a trade
- letting different management teams run different businesses
- allowing shareholders with different aims to go separate ways
- passing different businesses to different family members
- preparing one business for investment or sale, without the other
The reasons need to be real and consistent with the facts. HMRC can see when a stated reason doesn't match the structure. A reason that is mainly about the tax outcome is unlikely to help.
3. Full disclosure of what happens next
Many of the relevant rules look beyond the demerger itself. A clearance given on incomplete facts may not protect the transaction that actually happens.
So the application should cover plans that are known or reasonably expected, such as:
- a sale of one of the companies, or talks with a buyer
- new investors or a management buyout
- a liquidation or extraction of cash afterwards
- a shareholder leaving the UK
- gifts to family members or trusts
A planned sale doesn't automatically mean refusal. HMRC's guidance on the capital gains anti-avoidance rule accepts that restructuring so that a later share sale qualifies for a relief, once the relief's conditions have been met throughout the qualifying period, is not in itself caught. Other rules, such as the statutory demerger conditions and the SDLT clawbacks, take a stricter view of sales. Either way, the plan needs to be explained. See demerging before a sale.
4. Consistency between the parts
HMRC reads the whole application together. The commercial reasons, the steps, the shareholdings and the plans afterwards should tell one consistent story. Inconsistencies, such as a stated aim of keeping a business long term alongside steps that only make sense before a sale, are a common source of questions.
What HMRC doesn't need
It's also worth knowing what a clearance application is not. It isn't a request for HMRC to approve the commercial wisdom of the demerger, the valuations or the legal documents. HMRC isn't deciding whether the route is the best one, and it won't redesign the transaction for you. Nor does the application need to argue the tax analysis at length. HMRC needs the facts, the steps and the reasons, clearly and accurately, so that it can decide the specific questions each clearance asks.
A long application is not necessarily a better one. Unnecessary material can obscure the points HMRC actually needs to consider. Equally, leaving out a fact because it seems awkward is the surest way to undermine the clearance. The balance between completeness and clarity is where experience counts.
Who applies, and when
Some clearances must be made by a particular party. For example, a section 138 clearance is applied for by the acquiring company or the company whose shares are being acquired, and must be obtained before the shares are issued. The application usually goes in once the route and steps are settled, the shareholders have agreed the plan, and the key facts and figures are available, but before any step it covers is implemented.
Common reasons HMRC asks questions
Questions are normal and don't mean refusal. They often arise where an application involves:
- cash or loan notes reaching shareholders as part of the arrangements
- a company with significant cash or investments being separated, especially where a winding up may follow
- a shareholder becoming non-UK resident, where a deferred gain might fall outside UK tax
- share classes created shortly before the demerger without a clear explanation
- a sale or investor mentioned without detail on timing and terms
- unclear valuations, particularly in a partition where shareholders take different businesses
- missing information, such as accounts, shareholdings or the step order
HMRC can ask for further particulars, usually within 30 days of receiving the application. It normally then has a further 30 days from your reply to decide.
What happens if HMRC refuses
A refusal is not the end of the road. It means HMRC isn't satisfied on the facts presented. Options can include providing more information, restructuring the proposal, or in some cases asking the tribunal to decide. Because clearance comes before implementation, nothing irreversible has happened. That is the whole point of seeking it first.
Timeline at a glance
- Facts gathered and route chosen.
- Application prepared and agreed with the shareholders.
- Application submitted to HMRC.
- HMRC responds, or asks further questions, usually within 30 days.
- Implementation once clearance is received.
- Post-completion filings, such as stamp duty adjudication and any returns.
How we help
Our record is 100% of HMRC clearances obtained (50+ applications). That comes from understanding the facts properly, choosing the right route and presenting the commercial reasons accurately, not from any formula. We prepare the application, deal with HMRC's questions and keep the implementation in line with what was cleared. See how we work.
This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.
