CTM17250 - Distributions: demergers: introduction

CTA10/PART23/CHAPTER5

Sometimes businesses grouped together under a single company umbrella could be run more effectively if they were allowed to pursue their own interests under independent management and ownership.

The tax system inhibits the splitting up of businesses in this way as such a split will normally involve a distribution under CTA10/S1000.

The demerger provisions in CTA10/PART23/CHAPTER5 aim to make it easier to divide and put into separate corporate ownership the trading activities of a company or group of companies. The provisions do not apply where a trading activity is to be sold or becomes owned by a person other than the existing member of the original company.

The provisions allow the removal of the distribution charge in appropriate circumstances, making the distribution an ‘exempt distribution’. CTA10/S1075 provides that the legislation applying to distributions of a company does not apply to exempt distributions. The legislation also provides for some consequences for chargeable gains (CG).

Demergers relate to trading activities only. They can involve all sizes and types of company. Companies that make use of the demerger provisions range from small private companies to some of the UK’s largest public companies.

The broad effect of the legislation for the company making the exempt distribution, is that:

  • there is still a CG disposal, to which TCGA92/S139 may apply,
  • the provisions in TCGA92/S178 and S179 (anti-avoidance provisions relating to the transfer of assets from other companies in a group to a company that then leaves the group) do not apply to a company leaving a group solely as a result of the demerger,
  • for accounting periods ending before 6 April 1999 no ACT had to be accounted for on the distribution, and
  • for accounting periods ending on or after 6 April 1999 an exempt distribution is not a distribution for shadow ACT purposes.

The broad effect of the legislation for the shareholder receiving the exempt distribution is that the distribution will:

  • not be income, (or franked investment income for shadow ACT purposes),
  • normally not give rise to a CG disposal.

This will be because:

  • either it is not a capital distribution for the purposes of TCGA92/S122, and instead TCGA92/S126 to S130 (capital reorganisation) will apply, or
  • the demerger forms part of a reconstruction to which TCGA92/S136 applies.

The legislation provides a clearance procedure - see CTM17260. Even though clearance may have been given, a demerger may subsequently be exploited for avoidance purposes. The chargeable payments legislation at CTA10/S1086 seeks to counter this - see CTM17290.

For relief for legal costs of company demergers see CTM17320.