A demerger splits trading activities between separate companies owned by the same shareholders. The two main routes are a statutory demerger under Part 23 Chapter 5 CTA 2010, where the distribution is made exempt, and a liquidation demerger under section 110 Insolvency Act 1986, which relies on the winding up exclusion and the reconstruction reliefs. Both are normally carried out only after advance clearance from HMRC’s Clearance and Counteraction Team.

Why does splitting a company create a tax problem?

Handing shareholders a subsidiary or a trade is a transfer of value out of the company in respect of their shares. Without relief that is a distribution under section 1000 CTA 2010, taxed on individuals as dividend income, and the company may also face a capital gains charge on the assets it gives away (CTM17250). The demerger rules exist so that a genuine division of trading businesses among the existing owners does not trigger these charges. They do not help where a business is being sold or will end up owned by anyone other than the existing members (CTM17250).

What are the main routes?

Route How it works Key tax provisions
Direct statutory demerger Parent distributes shares in a 75% subsidiary to its own shareholders Sections 1075 and 1076 CTA 2010; section 192 TCGA 1992
Indirect (three cornered) statutory demerger Parent transfers a trade or a subsidiary to a new company, which issues shares to the parent’s shareholders Sections 1075 and 1077 CTA 2010
Liquidation demerger Company is wound up and the liquidator transfers each business to a new company that issues shares to the members Section 110 IA 1986; section 1030 CTA 2010; sections 136 and 139 TCGA 1992

How does a statutory demerger work?

CTM17280 describes the two statutory methods. In the direct route the business being demerged must be carried on by a 75% subsidiary, and the parent simply distributes the subsidiary’s shares to its ordinary shareholders, breaking the group. In the indirect route the distributing company transfers a trade or shares in a 75% subsidiary to another company, usually a new one, which issues its own shares to the distributing company’s shareholders.

Where the conditions are met, section 1075 makes the distribution an exempt distribution, so the distributions legislation does not apply (CTM17250). For shareholders, section 192 TCGA 1992 treats it as a share reorganisation rather than a capital distribution, so there is normally no disposal (CG45620, CTM17250). For the company, there is still a disposal for capital gains purposes, to which section 139 may apply, and a company leaving the group solely because of the exempt distribution does not suffer a degrouping charge (CTM17250). See capital gains groups and degrouping charges.

A direct demerger is still a distribution in company law, so the parent needs distributable profits; section 830 Companies Act 2006 allows distributions only out of profits available for the purpose.

What conditions must a statutory demerger meet?

Section 1081 CTA 2010 sets four general conditions:

  • Condition A: each relevant company is UK resident or resident in a member State at the time of the distribution.
  • Condition B: the distributing company is a trading company or a member of a trading group, and any subsidiary whose shares are distributed or transferred is a trading company or the holding company of a trading group.
  • Condition C: the distribution is made wholly or mainly to benefit some or all of the trading activities that will be carried on by two or more companies or groups afterwards.
  • Condition D: it is not part of a scheme with a main purpose of avoiding tax (including stamp duty and Stamp Duty Land Tax), making a chargeable payment, letting outsiders acquire control of a relevant company, or ceasing or selling a trade after the distribution.

Further conditions apply depending on the route, in section 1082 for direct demergers and section 1083 for indirect ones, and a clearance application must explain how they are met. The control and sale tests in Condition D are why a statutory demerger cannot be used as a step towards selling one business to a third party.

How does a liquidation demerger work?

Under section 110 Insolvency Act 1986, the liquidator of a company in voluntary winding up can transfer all or part of its business to another company and take shares in that company for distribution among the members. In a members’ voluntary winding up this needs a special resolution. CTM17310 gives the typical pattern: the company forms or uses new companies, the liquidator transfers a business to each, and each new company issues shares to the relevant shareholders.

Because section 1030 CTA 2010 excludes distributions in respect of share capital in a winding up from the distributions legislation, there is no income distribution and section 1075 is not needed (CTM17310). The capital gains side relies on the reconstruction reliefs: section 136 TCGA 1992 treats shareholders’ new shares as the same asset as their old ones, and section 139 lets the business assets pass to the new companies at no gain, no loss where the transferor receives no consideration other than the assumption of liabilities and the scheme is a scheme of reconstruction under Schedule 5AA (CG52700, CG52803). Section 139 applies only if the scheme is for bona fide commercial reasons and not mainly for tax avoidance (CG52810).

Because a liquidation demerger does not rely on section 1075, the trading conditions in section 1081 do not apply to it, though the reconstruction reliefs have their own commercial purpose test. The trade off is more steps and the cost of a liquidator. The targeted anti avoidance rule for winding up distributions is unlikely to apply to a genuine reconstruction of this kind (CTM36345); see the TAAR on distributions in a winding up.

Which clearances are needed, and how do you apply?

HMRC’s guidance on statutory clearances lists the provisions normally relevant to a demerger:

  • section 1091 CTA 2010, that a distribution will be exempt under a statutory demerger;
  • section 138(1) TCGA 1992, covering share exchanges and reconstructions under sections 135 and 136;
  • section 139(5) TCGA 1992, for reconstructions involving a transfer of business;
  • section 701 ITA 2007 and section 748 CTA 2010, under the transactions in securities rules.

One combined letter can cover all of them. It should list the provisions, describe each step with diagrams, give the commercial reasons, set out shareholdings before and after, include the latest accounts and, for a section 1091 application, explain how sections 1081 and 1082 or 1083 are met. Applications go to reconstructions@hmrc.gov.uk or by post to BAI Clearance, HMRC, BX9 1JL, and HMRC aims to reply within 30 days, or within 30 days of receiving any further information it asks for. SP13/80 sets out the demerger clearance procedure (CTM17260). A section 1091 clearance cannot be obtained retrospectively (CTM17270).

What reporting and anti avoidance rules apply afterwards?

A company making an exempt distribution must make a return to HMRC within 30 days under section 1095, giving details and the reason it is exempt; where clearance was given the return can simply confirm that (CTM17260). For five years after an exempt distribution, a chargeable payment, broadly a non commercial payment by a company involved to its members other than a distribution, is taxed as income under section 1086 and must be returned within 30 days under section 1096 (CTM17290). Advance clearance under section 1092 is available for proposed payments.

What goes wrong in practice?

  • Planning a demerger with a later sale of one business already in view, which breaches Condition D.
  • Assuming a statutory demerger works for a property investment business; Condition B requires trading companies or trading groups.
  • Carrying out steps in a different order from the clearance application; a clearance based on facts that were not fully and accurately disclosed does not protect the taxpayer (CG52810).
  • Forgetting Stamp Duty Land Tax and stamp duty, which have their own reliefs and conditions.
  • Overlooking the company law requirements for distributable reserves or the special resolution.

Where the aim is simply for one shareholder to leave, a company purchase of own shares may be simpler than a demerger.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.