Should You Set Up a Holding Company?

What is a Holding Company?

A holding company is a company which sits above one or more subsidiary companies within a corporate group. The trading company carries out the day-to-day business activities, while the holding company owns the shares in the trading company and may hold surplus cash, investments or interests in other businesses.

A typical structure may look like:

• Individual shareholder(s)
• ↓ Holding Company Ltd
• ↓ Trading Company Ltd

Holding company structures can offer significant commercial and tax advantages, but they are not appropriate in every situation. The right structure will depend on the activities of the business, the assets at risk and, importantly, the shareholders' longer-term plans.

The Key Benefits of a Holding Company

1. Asset Protection

One of the main reasons for introducing a holding company is to separate accumulated wealth from the risks of the trading business.

A successful trading company may build up significant cash reserves over time. If these funds remain within the trading company, they remain exposed to the commercial risks associated with that business.

Subject to sufficient distributable reserves and the relevant tax rules, profits can generally be paid as dividends from the trading company to its holding company without an additional Corporation Tax charge. Surplus cash can therefore potentially be moved away from the trading company and retained within the wider group.

This can be particularly valuable for businesses operating in sectors where there is a higher risk of contractual disputes, litigation or other commercial liabilities.

2. Reinvesting Profits

A holding company can be particularly useful where shareholders want to reinvest business profits rather than withdraw them personally.

For example, instead of taking a large dividend personally and then using the net proceeds to fund another business venture, profits may be distributed to the holding company and subsequently invested into another subsidiary.

A group could therefore develop as follows:

• Holding Company Ltd
• Trading Company A Ltd
• Trading Company B Ltd
• Property Company Ltd
• New Venture Ltd

This can allow capital generated by one successful business to be redeployed elsewhere within the corporate group without first having to extract the funds personally.

3. Separating Different Business Activities

A group structure can allow different businesses, activities or assets to be held within separate limited companies. For example, an established trading business could remain in one subsidiary while a new and potentially higher-risk venture is operated through another.

Keeping activities separate can:

• Reduce the exposure of one business to liabilities arising in another
• Make individual businesses easier to sell
• Allow investors to participate in a particular subsidiary
• Provide greater flexibility when restructuring the group
• Make the financial performance of different activities easier to assess

The companies must, however, genuinely operate as separate legal entities for the structure to provide the intended commercial protection.

4. Group Relief for Losses

Companies within a qualifying group may be able to surrender certain Corporation Tax losses between themselves. Broadly, the companies must satisfy the relevant 75% group relationship requirements.

For example, if one subsidiary is profitable while a newly established subsidiary generates trading losses, it may be possible for qualifying losses to be surrendered against profits elsewhere within the group.

This can be particularly useful for entrepreneurs launching new businesses alongside established profitable companies.

5. Moving Assets Within the Group

UK tax legislation provides relief for certain transfers of assets between companies within the same qualifying group. For Capital Gains Tax purposes, qualifying assets can generally be transferred between group companies on a no gain/no loss basis.

This means that an immediate taxable gain does not necessarily arise simply because an asset is transferred from one group company to another.

Care is required, however. If a company subsequently leaves the group after receiving an asset, a degrouping charge may arise. The timing and sequencing of group reorganisations should therefore always be considered carefully.

6. Selling a Subsidiary

One of the potentially most valuable advantages of a holding company structure arises where one of the subsidiary businesses is eventually sold.

The UK's Substantial Shareholdings Exemption (SSE) can exempt a company from Corporation Tax on gains arising from the disposal of shares in a subsidiary, provided the relevant conditions are satisfied.

This can mean that a holding company is able to sell a qualifying trading subsidiary and retain the sale proceeds within the holding company without Corporation Tax being charged on the gain. The proceeds could then potentially be reinvested into another business or investment.

There is, however, an important distinction. If a subsidiary is sold for £3 million, the £3 million belongs to the holding company, not personally to its shareholders. If the shareholders subsequently want to withdraw those funds personally, the tax consequences of extracting the money from the holding company must also be considered.

Holding Company Structures - Things to Consider

Although there are significant potential benefits, introducing a holding company also creates additional responsibilities and possible tax consequences.

Increased Administration

Each company within the group remains a separate legal entity. Additional companies can therefore result in additional:

• Annual accounts
• Corporation Tax returns
• Companies House filings
• Confirmation statements
• Bookkeeping
• Bank accounts
• Intercompany reconciliations
• Legal and professional costs

Transactions between group companies, including dividends, loans and management charges, must also be properly recorded.

Corporation Tax and Associated Companies

Creating additional companies can affect the Corporation Tax thresholds available to the group. The Corporation Tax small profits and Marginal Relief thresholds are divided by the number of associated companies.

This can mean that introducing additional companies causes profits to enter the higher Corporation Tax rates sooner than they otherwise would.

There are exclusions for certain passive holding companies, but the precise circumstances need to be reviewed. Associated company rules should therefore form part of the tax analysis whenever a group structure is being considered.

Future Sale of the Business

Perhaps one of the most important considerations is how the shareholders eventually intend to exit the business.

An individual selling shares in a qualifying trading company may potentially qualify for Business Asset Disposal Relief, subject to satisfying the relevant conditions.

The tax treatment can, however, be very different depending on whether:

• The shareholder sells their shares in the holding company
• The holding company sells a subsidiary
• The company sells the underlying trade and assets

A structure which is very efficient for an entrepreneur intending to reinvest the proceeds of a business sale may be less attractive for someone intending to sell their business and immediately receive the proceeds personally.

Future exit plans should therefore be considered before introducing the holding company rather than immediately before a sale.

Can You Add a Holding Company to an Existing Business?

Yes. A holding company does not necessarily need to be established when a business is first incorporated. It is common for an existing trading company to operate independently for a number of years before a holding company is subsequently inserted above it.

Typically, the existing shareholders exchange their shares in the trading company for shares in a newly incorporated holding company.

UK tax legislation contains reliefs which can allow qualifying share-for-share exchanges to take place without triggering an immediate Capital Gains Tax liability. Stamp Duty relief may also be available where the relevant conditions are satisfied.

The transaction must be structured and documented correctly and, depending on the circumstances, obtaining advance clearance from HMRC may also be appropriate. A holding company should therefore not simply be inserted by transferring shares without first considering the tax consequences.

Holding Companies - Final Thoughts

A holding company can be an extremely useful structure, particularly for business owners who intend to build up significant reserves, invest in further businesses or eventually sell individual subsidiaries.

Some of the main reasons for considering a holding company include:

• Protecting accumulated cash from trading risks
• Reinvesting profits into new businesses
• Separating different commercial activities
• Accessing group relief for qualifying losses
• Moving assets more efficiently within a group
• Providing greater flexibility for future acquisitions
• Potentially benefiting from the Substantial Shareholdings Exemption when selling a subsidiary

However, a holding company should not be created simply because a business has become profitable. The shareholders' long-term objectives, future investments, Corporation Tax position and eventual exit strategy all need to be considered.

The most tax-efficient structure today is not necessarily the most tax-efficient structure when the business is sold.

How RUS Can Help

Our specialist tax team can help business owners assess whether a holding company or wider group structure is appropriate for their circumstances.

We can help you:

• Review your existing company structure
• Assess whether a holding company would provide meaningful commercial or tax benefits
• Consider asset protection and future investment plans
• Review the Corporation Tax and associated company implications
• Advise on share-for-share exchanges and available tax reliefs
• Assist with HMRC clearance applications where appropriate
• Consider the implications for Business Asset Disposal Relief and future exits
• Advise on transactions and funding between companies within the group
• Work alongside your solicitor when implementing the restructuring

Contact our team today if you are considering introducing a holding company, establishing a new subsidiary or restructuring an existing group.

This article is intended as general guidance only and should not be treated as individual tax, legal, investment or financial advice. Professional advice should be obtained before transferring business interests or corporate restructuring.