Holding Companies

1st August 2022

Used to mitigate risk or achieve tax efficiencies, holding companies are becoming ever more valuable in a world of rising interest and costs.

A Holding company is, in short, a parent company that owns subsidiary companies. Those subsidiary companies would naturally include a trading company, but could include a number of companies also set up to mitigate trading risks. They can be used in small groups with just one subsidiary company, or across multi-national groups.

To one extreme, the largest groups may split out each business line, property, brand, and any other valuable asset into its own subsidiary company; each subsidiary controlled and owned by the holding company.

These aren’t just for the multi-national corporations though and increasingly they’re being used by owner managed businesses to protect assets or facilitate business disposals.

Benefits:

Liability limitation – Should a subsidiary become insolvent, only its own assets can be liquidated for the creditors. Splitting a trading business from the assets they use (e.g. commercial property) into separate subsidiary companies protects those valuable assets in the event that the trading company should become insolvent. With interest rates and credit risks increasing, protecting your most valuable business assets means that you don’t have all your eggs in one basket.

Tax savings – Dividends received by UK companies are generally exempt from Corporation Tax and so the profits of the trading company, voted up to the holding company, will not be subject to more Corporation Tax in the holding company. The dividends out to the shareholders can be arranged tax efficiently from the holding company.

Since dividends up to the Holding company are tax free, it is sensible then to vote profits and free cash up to the Holding company as a matter of course in order to protect that asset.

Transfers of assets between group members are generally free of any Corporation Tax charged on capital gains, subject to some restrictions should assets later leave the group.

Tax losses arising in one company can be offset against profits made by other group companies.

Selling businesses – A group structure under a holding company makes it possible to sell an individual subsidiary whilst keeping the rest of the business structure intact. Often this can come with considerable disposal related tax savings e.g. selling a property company rather than a property saves the purchaser SDLT; and, selling a holding of more than 10% in a trading subsidiary can exempt the gain on disposal from Corporation Tax.

Drawbacks:

Increased cost – Naturally this will come with increased compliance and cost in running two (or more) companies, but often the tax savings and risk reduction would more than make up for the additional cost.

Administration – the set up of a holding company and transferring assets to new group companies comes with an administration burden and requires HMRC clearance. Managing intercompany balances also requires care to ensure that the liability limitation benefits are not at risk.

Quarterly instalment payments – Creating a larger group structure could bring the trading company inside the scope of quarterly Corporation Tax payments. The applicable profit thresholds are divided by the number of group companies, and so the more group companies the lower the limit to breach.

Next steps:

If you’re interested in finding out more, or whether your particular circumstances would benefit from a revised structure then don’t hesitate to get in touch.