Indirect trade demerger: avoiding income tax charge – part 1

In the first article of two parts on demergers, Paul Davies, tax writer at Croner-i, investigates how to achieve a tax effective separation of a company’s trading activities using an indirect trade demerger, outlining the conditions that must be met for the shareholders of the distributing company to avoid an income tax charge

It will be seen that an indirect trade demerger within the exempt distribution rules may be appropriate where trading activities presently carried on by one company are capable of separation into two (or more) trades and where the intention is that each of the separated trades will be carried on by two (or more) companies under common ownership, ie, where the shareholders of the companies carrying on the demerged trades after the separation are the same as the shareholders of the original company.

The rules are not appropriate where one or more of the demerged activities do not constitute trading activities (as defined for tax purposes) or in connection with:

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