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This guidance note follows on from the Capital reduction demerger ― overview guidance note which gives an introduction to capital reduction demergers and includes diagrams to illustrate a typical demerger via that route.

The tax consequences of a capital reduction demerger are similar to those applicable to a demerger via a liquidation (see the Demerger via liquidation - tax analysis guidance note). This is because the definition of scheme of reconstruction in TCGA 1992, Sch 5AA includes a reconstruction under CA 2006, Part 26. The availability of CGT reconstruction reliefs in TCGA 1992, ss 136 and 139 should give a tax-efficient result. However, there are potential tax liabilities under this route, particularly stamp duty and / or stamp duty land tax (SDLT).

The main difference in the tax analysis relates to the position of the shareholders, which is discussed below.

HMRC clearances will be required if this demerger route is chosen and appropriate time should be built into the transactions process for these. For more information,