SOS – save our demergers: how HMRC’s consultation may affect your plans
HMRC has published a consultation document titled Modernising the taxation of distributions and repayments of capital from companies.
At this point you are probably thinking this sounds very tedious and why do we need to trouble our busy readers with it?
Much of the document does deal with highly technical matters, including the differences in treatment between UK and non-UK company distributions. But section 3 deals with demergers, and this is the bit that could be of interest, and concern, to business owners and shareholders.
If you are thinking about a demerger, particularly in contemplation of a sale, the proposals could make demergers considerably less flexible, with knock-on effects for your long-term planning and the tax outcome.
The consultation seeks views on updating the rules that govern how money or value paid out by a company to its shareholders is taxed, including certain types of demerger. To assess the potential impact, it’s helpful to understand how UK company demergers work at present.
Reasons for demerging
A demerger is the splitting of an existing company or group into two or more separate companies or groups. That may involve:
- Two or more divisions being split into different entities with the same shareholders; or
- The splitting of the business into two or more entities where the demerged entities have different shareholders
The second of these can happen where shareholders have fallen out or have different ideas about how the business should be run.
It is also common where siblings inherit a business from their parents and want to go in different directions.
Types of demerger
Under present UK rules, a demerger may be either statutory or non-statutory
Statutory demergers
These are carried out under specific demerger provisions in the tax legislation. The conditions are long and detailed. They include:
- The demerged entities must be trading, which means the statutory demerger can’t be used for property or other investment companies
- The demerger must not be carried out in contemplation of a sale or cessation of all or part of the business
These lengthy conditions, in particular those mentioned, mean that in practice very few people use statutory demergers, a point HMRC make in the consultation document.
The reason that the legislation does not permit demergers in contemplation of sale is because these are seen as “disguised” dividends. That is to say the group could simply sell the division concerned and pay proceeds out as a dividend. The dividend would be subject to income tax at rates up to almost 40%. Doing a tax efficient demerger and then selling one of the entities has the same effect as paying a dividend out of proceeds, but with capital gains tax on the sale at 24%!
Non-statutory demergers
These are not specifically provided for in the tax legislation, but are carried out in a way which enables them to fall within certain tax reliefs.
There are two main types of non-statutory demerger:
- A capital reduction demerger, as its name suggests, involves reducing the company’s capital and distributing out the entity to be demerged
- A liquidation demerger involves liquidating the company (or one inserted above it) and distributing out the entities to the intended recipient shareholders
Non-statutory demergers don’t come with the same long list of conditions. In particular, there is nothing that specifically says they can’t be done in contemplation of all or part of the business being sold. This makes them appealing to many business owners and shareholders.
In practice for a demerger, it is generally recommended that HMRC clearance be sought, and HMRC will often deny clearance where a sale is intended. However, in some circumstances (discussed below) HMRC may clear the demerger even though a sale is contemplated. Non-statutory demergers therefore offer a degree of flexibility not available in statutory demergers.
The proposed change to demergers
The consultation proposes that the non-statutory capital reduction demerger would no longer be permitted.
The conditions for statutory demergers will be relaxed to make them more attractive and more widely available. However, the condition that a statutory demerger must not be in contemplation of sale, while it may be tinkered a bit, essentially seems to remain.
It is not entirely clear what will happen to liquidation demergers. As far as we can see, these will remain permitted. So the inflexibility of statutory demergers might still be avoided by a liquidation demerger. However, liquidation demergers are more costly and cumbersome in that they involve the appointment of a liquidator and in recent years the non-statutory capital reduction demerger has become much more prevalent.
The removal of the capital reduction route threatens to impact a number of scenarios where a demerger in contemplation of a sale might reasonably be permitted. These include:
Where the demerged entity to be sold represents a large, or the major portion of the value of the original combined business
- This could be the case because the vendors want to sell the entire business but a prospective purchaser does not want to buy certain small parts of it.
Property investment companies
- Very often one shareholder may want to build the property portfolio further while the other wants to sell or scale down. This is very common after siblings have inherited the business from their parents
There is therefore a risk that demergers could become considerably more inflexible and not always meet the objectives they’re trying to achieve.
The consultation closed in September; we wait to see how the Government and HMRC decide to move forward with this. But if you want to secure the current benefits of a demerger, we recommend seeking professional advice on whether you should accelerate your plans.
How BKL can help
Our specialists support businesses at every stage of a transaction – including demergers and sales – from early planning and preparation to completion. This covers expertise in tax and experience in the property sector.
We can help you to avoid pitfalls, stay in control and achieve the most tax-efficient outcome for everyone involved.
For a conversation about how we can help, get in touch with Andrew Levene using the form below.
Read how we designed a bespoke demerger structure for a £30m family-owned property group: supporting the family’s interests, minimising the tax liabilities and securing HMRC clearance before the demerger proceeded.
Contact Andrew
Frequently asked questions: UK company demerger rules
How does a company demerger work in practice?
A demerger separates an existing company or group into two or more independent businesses. In many cases, the same shareholders continue to own the newly separated entities, although demergers can also be used where different shareholders take ownership of different parts of a business. This can help resolve succession issues, shareholder disputes, differing growth strategies, or plans to separate distinct business activities. The exact structure will depend on the group’s objectives, ownership arrangements and tax position. Based on the circumstances, a statutory or non-statutory demerger may be considered.
Can a demerger be carried out if a sale of the business is planned?
Possibly, but the position depends on the type of demerger and the facts of the case. Statutory demergers are generally subject to conditions that prevent them being undertaken in contemplation of a sale. Non-statutory demergers have historically offered more flexibility, it is strongly recommended that HMRC clearance is sought and HMRC may reject clearance if a demeregr is linked to future sale. The Government’s consultation from June-September 2026 proposed changes that could significantly affect how demergers connected to sales are undertaken in future.
What is HMRC clearance and why is it important for a demerger?
HMRC clearance is a formal process used to obtain confirmation that certain tax anti-avoidance provisions should not apply to a proposed transaction. For demergers, obtaining clearance can provide greater certainty over the intended tax treatment before implementation.
Are property investment companies affected by the proposed demerger changes?
Property investment companies could be among the businesses most affected. Statutory demergers
It is unlikely that the proposed changes will prevent a property investment company from demerging. However, there may be less flexibility where the demerger is in contemplation of a sale of cessation of the business.
What happens if shareholders want to separate because they no longer agree on the future of the business?
A demerger is often used to facilitate an orderly separation where shareholders have different commercial goals. This may arise following a dispute, management succession, family ownership transitions or inherited businesses where individual shareholders want to pursue different strategies. Separating the business into standalone entities can allow each party to operate independently while potentially avoiding the disruption that a full sale or winding-up might create.
Is it a misconception that all demergers qualify for tax relief?
Most company business separations can be completed tax-efficiently provided relevant conditions are met including specific legislative requirements, qualifying for particular reliefs, or obtaining HMRC clearance where appropriate. The structure, ownership, business activities and future plans for the company can all influence the availability of relief.
When should business owners consider restructuring before the rules change?
Businesses considering a demerger may wish to assess their options sooner rather than later. HMRC’s consultation is exploring changes that could remove or restrict some currently available routes, particularly certain non-statutory capital reduction demergers. While no final rules have yet been confirmed, businesses with active succession plans, shareholder separation discussions or potential transaction activity may benefit from reviewing their position before any reforms are introduced.
What should businesses do if they think a demerger may be appropriate?
If you are looking to split your business – either by creating separate groups owned by the existing shareholders, or by splitting the business between shareholders – you should seek professional tax advice on how the split can be achieved without significant tax arising. You will also need a lawyer to advise on legal issues and to implement the split.
