Exemptions and reliefs: reliefs: Section 77A – Capital Reduction Demergers
During a capital reduction demerger some of the assets or shares of a group are split out under a new holding company. The shares in the holding company are redesignated so that the rights are attributable to different assets held by the group. The demerger is achieved by a reduction of one class of shares and the cancellation of those shares. The share capital represented by those shares is returned to the shareholders by transferring the demerged assets to a new company owned by those shareholders.
The insertion of the holding company is often achieved through a share for share exchange so that the holding company is the “acquiring company” for the purposes of FA86/S77. Relief under FA86/S77 can be claimed if all the relevant conditions are met. However, relief will not be available if there is a disqualifying arrangement under FA86/S77A(2) in existence at the time the instrument effecting the share for share exchange is executed.
If the effect of demerger arrangements will be that a particular person or particular persons together obtain control of the acquiring company, these will be disqualifying arrangements for the purposes of FA86/s77A(2) as it will be reasonable to assume that the purpose or one of the purposes of the arrangements is to secure this change of control.
STSM042460 provides information on what are “disqualifying arrangements”