What HMRC Looks For in a Demerger Clearance Application

For most UK private company demergers, the first formal step is not a board meeting or a legal document. It is an application to HMRC for clearance. Clearance gives you certainty that, on the facts you have presented, HMRC accepts the transaction is not caught by specific anti-avoidance rules. This post sets out at a high level what HMRC needs to see and why applications draw questions. It is not a drafting guide, since how an application is built depends on the facts.

What clearance is and is not

A clearance is HMRC's confirmation that a particular statutory test is met for a described transaction. The ones usually used for demergers are:

These can usually be requested in one application to HMRC's clearance team, and HMRC must normally respond within 30 days of receiving a complete application.

Clearance is not confirmation that every relief applies, because it answers only the question each section asks. It does not cover stamp duty or SDLT, which are claimed separately. And it does not protect a different transaction from the one described.

The four things HMRC needs to see

1. A clear picture of the transaction

HMRC must understand every step, company and shareholder. That means the companies and what they do, shareholdings before, during and after, each step in order with dates where known, any consideration (shares, loan notes, cash or assumed liabilities), recent accounts, and the provisions under which clearance is sought. Structure diagrams at each stage are standard. If HMRC has to guess how something works, it will ask.

2. Genuine commercial reasons

Most of the tests are about purpose. Since 26 November 2025 the capital gains rules in sections 137 and 139 TCGA 1992 ask whether a main purpose of the arrangements is to reduce or avoid tax. The statutory demerger rules ask whether the distribution is mainly for the benefit of trading activities and whether it is part of a scheme with tax avoidance as a main purpose. Stamp duty and SDLT reliefs still refer to bona fide commercial reasons.

So the application has to explain why the demerger is happening. Typical reasons include separating a property portfolio from the risks of a trade, letting different management teams run different businesses, allowing shareholders with different aims to part company, passing different businesses to different family members, and preparing one business for investment or sale without the other. The reasons must be real and consistent with the facts. A reason that is mainly about the tax outcome is unlikely to help.

3. Full disclosure of what happens next

Many of the relevant rules look beyond the demerger itself. A clearance given on incomplete facts may not protect the transaction that actually takes place. The application should therefore cover plans that are known or reasonably expected, such as a sale of one company or talks with a buyer, new investors or a management buyout, a liquidation or extraction of cash afterwards, a shareholder leaving the UK, and gifts to family or trusts.

A planned sale does not mean automatic refusal. HMRC's guidance on the capital gains anti-avoidance rule accepts that restructuring so a later share sale qualifies for a relief, once the relief's conditions have been met throughout the qualifying period, is not in itself caught. Other rules, including the statutory demerger conditions and the SDLT clawbacks, take a stricter view of sales. Either way, the plan has to be explained.

4. Consistency

HMRC reads the application as a whole. The reasons, steps, shareholdings and later plans should tell one story. A stated aim of keeping a business long term sitting beside steps that only make sense before a sale is a common source of questions.

What HMRC does not need

An application is not a request for HMRC to approve the commercial wisdom of the demerger, the valuations or the legal documents. HMRC is not deciding whether the route is the best one and will not redesign the transaction. Nor does the application need to argue the tax analysis at length. HMRC needs the facts, the steps and the reasons, set out clearly and accurately. A long application is not necessarily better, since unneeded material can hide the points HMRC must consider. Leaving out an awkward fact is the surest way to undermine the clearance.

Who applies and when

Some clearances must be sought by a particular party. A section 138 clearance, for example, is applied for by the acquiring company or the company whose shares are being acquired, and must be obtained before the shares are issued. The application normally goes in once the route and steps are settled, the shareholders have agreed the plan and the key facts and figures are ready, but before any covered step is taken.

Why HMRC asks questions

Questions are normal and do not mean refusal. They commonly arise where an application involves:

• cash or loan notes reaching shareholders
• a company with significant cash or investments being separated, especially if a winding up may follow
• a shareholder becoming non-UK resident, so a deferred gain might fall outside UK tax
• share classes created shortly before the demerger without a clear reason
• a sale or investor mentioned without detail on timing and terms
• unclear valuations, particularly in a partition
• missing accounts, shareholdings or step order

HMRC can ask for further particulars, usually within 30 days of receiving the application, and normally has a further 30 days from your reply to decide.

If HMRC refuses

A refusal means HMRC is not satisfied on the facts it has seen. You can supply more information, restructure the proposal or, in some cases, ask the tribunal to decide. Because clearance comes before implementation, nothing irreversible has happened. That is the point of asking first.

The usual order

Gather the facts and choose the route. Prepare the application and agree it with the shareholders. Submit it. HMRC responds, or asks questions, usually within 30 days. Implement once clearance is received. Then complete the filings that follow, such as stamp duty adjudication and any returns.

Our specialist team prepares the application, and the advice is reviewed by a Chartered Tax Adviser. We have obtained 100% of the HMRC clearances we have applied for, across 50+ applications. To discuss yours, book a call with our team, or see our page on the capital reduction demerger.

This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.

For more on how demergers work in practice, see our specialist demerger practice, Demerger Tax.