CheckLists.Tax (beta)
G15. Capital reduction demerger
General
- A capital reduction demerger generally involves the following steps:
(1) Holding company (Holdco) inserted above existing company (Oldco) by way of share for share exchange.
(2) Part of the business/assets of Oldco is/are transferred to Holdco.
(3) Shares in Holdco reorganised into two classes. Class A is entitled to Oldco, Class B is entitled to the transferred business.
(4) Newco established.
(5) One class of shares in Holdco is cancelled, Holdco distributes the corresponding assets to Newco in return for Newco issuing shares to the shareholders of the cancelled class.
Partition or reconstruction
Depending on the intended ownership of Holdco and Newco after the demerger, the demerger will either be a partition (different ownership) or reconstruction (same ownership as Oldco).
Legislation:
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Commentary: TCCR W1.3.7.
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STEP 1: INSERTION OF NEW HOLDING COMPANY
Step 1: Insertion of new holding company
See G2: Insertion of new holding company
Stamp duty
XX
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STEP 2: TRANSFER OF BUSINESS/ASSETS TO HOLDCO
Step 2: Transfer of business/assets to Holdco
See G5: Intra-group transfer of asset and G6: Intra-group transfer of business
SDLT: exemption for distributions
- Distribution of land by way of dividend is not a chargeable transaction.
Legislation: FA 2003, s.54(4)
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STEP 3: REORGANISATION OF SHARES IN HOLDCO
Step 3: Reorganisation of shares in Holdco to create multiple classes
See G1: Re-organisation of share capital
Company law
The articles must be amended such that Class A is entitled to any dividends paid out of distributions from X Ltd and, in a winding up or distribution in specie, to the shares in X Ltd or assets representing those shares. Class B shares are entitled to any dividends arising out of the transferred business and, in a winding up or distribution in specie, the assets of that business or assets representing those assets.
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STEP 4: CREATION OF NEWCOs
Step 4: Creation of NewCos
Stamp duty
XX
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STEP 5: CAPITAL REDUCTION DEMERGER
Step 5: Capital reduction demerger
De-grouping
XX
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De-grouping
XX
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Capital gains tax for shareholders
Share reorganisation treatment
- Direct distribution would trigger s.122 as a capital distribution.
- Indirect distribution of demerged activity to Newco can fall within TCGA s.136.
- 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
No gain no loss treatment
-
Legislation: TCGA s.139.
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Tax avoidance purpose test
See G2: Inserting a holding company
Seeking rebasing due to s.179 and s.139
- Where s.179 applies to a transaction falling within s.139, the effect is that the degrouped assets get a tax free uplift in base cost.
- If this is a main purpose of the transaction, s.139 will be disapplied.
- Best practice is to disclose any intention to rely on the point in application for clearance.
Legislation: TCGA s.138; s.139(5)
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Commentary: TCCR W1.4.4
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Degrouping
Tax-free uplift in base cost of de-grouped assets
XX
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Stamp duty
Reconstruction: relief available
XX
Legislation: FA 1986, s.75.
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Partition: relief not available
- Transferring shares in a subsidiary to Newco in return for Newco issuing shares to Holdco's shareholders is a sale.
- Consideration is deemed to be market value.
Legislation: FA 1986, s.75.
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- Partition relief
- Person acquiring control must have held at least 25% interest for previous 3 years.
- Not sufficient that a group acquiring control have, together, held at least 25% interest for 3 years.
Capital reduction demerger
- s.77A relief may be available even if the demerger will result in a change of control of the acquiring company, provided certain conditions are met (STSM042520).
- Person who has held at least 25% of the issued share capital in the target company during the relevant period is excluded when determining whether a disqualifying arrangement exists.
Legislation: FA 1986, s.77A
Cases:
HMRC manuals:
STSM042520 - Exemptions and reliefs: reliefs: Section 77A – Capital Reduction Demergers;
STSM042460 - Exemptions and reliefs: reliefs: Section 77A -Disqualifying arrangements;
Commentary: TCCR W1.3.7
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SDLT: transfer of subsidiary
No degrouping charge on a reconstruction
XX
Legislation: FA 2003, Sch 7, para 4(4)
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SDLT: transfer of assets
Reconstruction
- Normally exempt
Legislation: FA 2003, Sch 7, paras 7 - 8
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Partition: transfer as part of trade
- Acquisition relief available to reduce rate to 0.5%
Legislation: FA 2003, Sch 7, paras 7 - 8
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Partition: transfer not part of transfer of trade
- Acquisition relief not available.
- Consider leaving the investment land in Oldco, inserting Holdco above, transferring trade to Holdco and distributing Oldco shares.
Legislation: FA 2003, Sch 7, paras 7 - 8
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Commentary: TCCR W1.3.6
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