Why do people have a holding company?

holding company structure can be a powerful asset protection and risk management tool for business owners. It is better to think of it as moving from a single company structure to a group structure. Although a Group Structure may sound like something that only big national businesses would do there are some significant advantages for small business owners.  

A group is formed when there is a holding company that you own as the overall business owner. This holding company then owns the majority, or all, of the shares in your trading company and any other asset holding companies.  The important thing is that the holding company is at the top, rather than holding everything in the same trading company. A group structure is very effective for safeguarding any of the following:

  • Fixed assets such as plant and machinery, IT equipment, website domains
  • Commercial or residential property
  • Intellectual property, patents and trademarks
  • Investments
  • Cash reserves

The holding company type structure can also have the benefit of allowing you to operate multiple trading businesses from separate limited companies. This can be useful for new ventures, so that the existing business doesn’t take on all the risk of the new project.  In the current climate we can see many businesses toying with diversifying and looking at alternative business projects to help them and their staff survive now and grow on the other side.

When properly structured, each subsidiary company of the holding company would have limited liability and not be liable for any liabilities of the other companies in the group (except for any money loaned between them). The group also gives the companies access to a few additional perks, including ability to share losses within the group.  So, a new venture can be loss making, the existing business has no risk financially to the new venture but can use those losses to reduce its own tax bill.

How would the cash move around in a group structure? 

Your trading company would vote a dividend to the holding company and transfer the money. These dividends either sit in the holding company or are partially paid out to shareholders of the holding company. 

Dividends from a UK company are paid out after tax. If received by another Limited company, they do not form part of the taxable income of that company. So dividends from one company to another do not incur a tax bill.

What if I then want to sell my trading business?

If you own a trading company as an individual you are probably aware of entrepreneurs relief that reduces the capital gains tax payable on the sale of shares to 10% on the first £1m of capital gains made (in your lifetime) provided you own more than 5% of the voting shares for over 2 years prior to sale and are an employee or officer. 

If your trading business is now owned by a holding company you can also qualify for entrepreneurs relief if it only owns the shares of one trading company, you are selling all businesses owned by holding company and the holding company does not own significant investments (greater than 20% of overall assets as a general rule) not used for the purposes of the trade.

If your holding company does own significant other assets then you may choose to sell the shares out of the holding company suffering the current rate of corporation tax (19% in 2020) on the sale and personal tax on any money withdrawn via dividends which would vary depending on your other income in the tax year drawn unless the holding company is trading in its own right, qualifying for substantial shareholding exemption which means you wouldn’t pay any company tax on the disposal of those shares.

Can I involve my family in the holding company? 

Yes, you can. You could consider gifting a share of your existing business/group value or introduce new shares to entitle them to future value helping to put a cap on your estate for inheritance tax. 

If they aren’t involved in the running of the business, it would mean any disposal of shares by them would be taxed under capital gains tax without the ability to claim entrepreneur’s relief. 

If you are considering protecting the assets or large cash reserves held in your trading business, talk to your principal advisor without delay.

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