CheckLists.Tax (beta)
G15. Statutory demerger
Statutory demerger
Conditions for relief
Situations where relief does not apply
- If main object is the acquisition of control of a participating company by a third party.
- Investment businesses.
Direct or indirect
Direct statutory demerger
Shares in a subsidiary are distributed directly to all or some of the shareholders.
Indirect statutory demerger of shares
Shares in a subsidiary are distributed to a Newco in return for that Newco issuing shares to all or some of the shareholders of Oldco.
Indirect statutory demerger of trade
Trade is transferred to a Newco in return for that Newco issuing shares to all or some of the shareholders of Oldco.
Partition or reconstruction
Partition
Shareholdings across the companies after the demerger do not mirror those before.
Reconstruction
Shareholdings across the companies after merger do mirror those before.
Income tax for shareholders
Exemption
- Exempt distribution is not a distribution for the purposes of corporation tax
Legislation: CTA 1075(1)
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- Income or capital for person receiving shares
Trustees
- The basic position is that the shares received in a direct demerger are capital, but those in an indirect demerger are trust income.
- Trusts (Capital and Income) Act 2013, s.2, classifies al shares on a tax exempt demerger as capital (TSEM3787).
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Capital gains tax for shareholders
Direct demerger
Reorganisation of share capital treatment
XX
Legislation: TCGA s.192(2).
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Unless substantial shareholding exemption applicable
XX
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Indirect demerger
Reorganisation of share capital treatment
- TCGA s.192 only applies to distributions that are exempt under CTA 2010 s.1076 (i.e. direct demergers).
- Section 136 applies the share reorganisation rules to the shares held before the the shares/debentures held after.
- Must be a scheme of reconstruction.
- Newco must issue shares to original shareholders/a class of them in proportion to their holdings in Oldco.
Legislation: TCGA s.136
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Capital gains for Oldco
Direct demerger: need to rely on substantial shareholding exemption
- TCGA s.139 only applies where there is a transfer of all or part of Oldco's business to a Newco.
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Indirect demerger: no gain/no loss disposal
No gain/no loss disposal means substantial shareholding exemption does not apply.
Legislation: TCGA s.139; Sch 7AC, para 6(1)(a).
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Corporation tax
Transfer of intangibles
Usually tax neutral.
Legislation: CTA 2009, s.818
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Loss carry forward following transfer of trade
Reconstruction
Usually neutral.
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Partition
XX
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Capital allowances following transfer of trade
Reconstruction
Usually neutral.
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Partition
XX
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SDLT: degrouping on demerger of subsidiary
Direct demerger: degrouping charges may arise for past transfers on which group relief was claimed
XX
Legislation: FA 2003, Sch 7, para 3.
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Indirect reconstruction demerger: no degrouping charges
XX
Legislation: FA 2003, Sch 7, para 4(6)
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Indirect partition demerger: degrouping charges
XX
Legislation: FA 2003, Sch 7, para 4(6)
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SDLT: land transferred when transferring trade
Transfers of land in a reconstructions normally exempt
XX
Legislation: FA 2003, Sch 7, para 7 and 8
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Transfers of land in a partition charged at 0.5%
XX
Legislation: FA 2003, Sch 7, para 7 and 8
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Stamp duty
Direct demerger: no stamp duty
Distribution of shares is not a sale.
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Indirect partition demerger: no stamp duty
Distribution of shares is not a sale.
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Indirect reconstruction demerger: no stamp duty
Distribution of shares is not a sale.
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Degrouping charges: direct demerger
Capital gains tax
Disapplied.
Legislation: TCGA s.192(3)
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Loan relationships
- De-grouping charge does not apply if the transferee ceases to be a member of the group as a result of a s.1075 exempt distribution.
- Unless there is a chargeable payment within 5 years of the distribution.
- For chargeable payments see CTA 2010, s.1088.
Legislation: CTA 2009, s.345 and 346.
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Intangible fixed assets
Disapplied
Legislation: CTA 2009, s.787.
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Degrouping charges: indirect demerger
Capital gains tax
- Tax free uplift in base cost of assets within s.179.
- Unless arrangements had a main purpose of avoiding tax.
Legislation: TCGA s.139; s.179
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Loan relationships
- Degrouping charge if transferee ceases to be a member of the group within 6 years.
- No degrouping charge if transferor ceases to be a member of the group.
Legislation: CTA 2009, s.344; s.345.
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Intangible fixed assets
XX
Legislation: CTA 2009, s.787.
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