Close Investment-Holding Company: When the 25% Rate Applies to You

Quick answer: A close investment-holding company (CIHC) is a company controlled by a small group of people, or by its directors, that does not exist wholly or mainly for permitted purposes such as trading or letting property to unconnected tenants. It pays corporation tax at the 25% main rate on all its profits, with no 19% small profits rate and no marginal relief. Most Family Investment Companies, many premises companies and some cash-holding companies fall into it.

Two ideas in one name

The label has two parts.

Close company. A company is close if it is controlled by five or fewer participators, or by its directors. Nearly every owner-managed company is a close company. It is not a penalty in itself, but it brings extra rules, such as the charge on loans to participators.

Investment-holding. This is the test that matters here. Under section 18N of the Corporation Tax Act 2010, a close company is a close investment-holding company unless it exists wholly or mainly for certain permitted purposes. "Mainly" is judged on the facts and is usually read as more than half.

What counts as a permitted purpose

In general terms, a close company is outside the CIHC rules if it exists wholly or mainly for:

• carrying on a trade on a commercial basis;
• investing in land to let to people who are not connected with the company;
• holding shares in, or securities of, qualifying subsidiaries that carry on such activities;
• coordinating the administration of a group of such companies.

Companies that do these things are not CIHCs. A trading company is not. A holding company whose subsidiaries are genuine trading companies is generally not. A company letting commercial or residential property to unrelated tenants on commercial terms generally is not.

The following are generally not permitted purposes:

• holding cash, deposit accounts or a portfolio of shares and funds;
• lending money to connected parties;
• letting property to the owner's own trading company or to family members;
• holding assets for growth, such as shares in a company that is not part of a qualifying group.

The test looks at what the company does in each accounting period, so a company can move in or out of the status. Our service page on the linked investment company explains how the status affects this type of structure.

What the status costs

A CIHC pays corporation tax at the main rate, 25% from 1 April 2023, on all of its profits. It cannot use the 19% small profits rate and there is no marginal relief. A company that is not a CIHC pays 19% on profits up to £50,000, 25% above £250,000, and a blended rate in between.

For a company with profits above £250,000 there is no difference. For a company with profits of £30,000, the gap is 6 percentage points, or £1,800 a year. The difference matters most to smaller companies.

The status does not usually affect these points:

• dividends received from UK companies are still normally exempt from corporation tax;
• the loans to participators rules apply to all close companies, not only CIHCs;
• inheritance tax and capital gains tax on the shareholders follow their own rules.

Example: A company has taxable profits of £30,000. If they come from letting property to unconnected tenants on commercial terms, the company is not a CIHC and pays 19%, which is £5,700. If the same £30,000 comes from interest and gains on cash and a share portfolio, the company is a CIHC and pays 25%, which is £7,500. The extra cost is £1,800 a year. Dividends it receives from UK companies are normally exempt either way. The figures are hypothetical, and the answer depends on what the company mainly does.

Common structures and where they land

Mixed companies are the most difficult. If a trading company also holds a substantial investment portfolio, the status depends on what it "mainly" does.

Planning around the rule

The first question is whether the extra tax is a real problem. For many companies it is a small cost against the benefits of the structure. A Family Investment Company, for example, is often built with the 25% rate in mind. Dividends it receives are normally exempt, and the benefits come from other features. Our guide on family investment companies and the 25% rate covers this.

Where the extra cost matters, the options include:

• Let to unconnected tenants. A property company that lets commercially to third parties is outside the status. A lease to a connected business is the usual problem.
• Keep property in the trading company. Not always possible, and there are trading status points. See how to structure a property group.
• Place a company under a qualifying holding company. A holding company over qualifying subsidiaries may fall outside the status. The subsidiaries then pay their own rate.
• Accept the rate and use the structure for other reasons. Asset protection, succession and flexibility are common reasons.
• Change the mix. A company that becomes mainly trading can leave the status. Changing it needs care, because the facts, not the name, decide.

What to watch for

• Accounting period changes. Test each period, not just the year you set up the company.
• Associated companies. A CIHC is not entitled to the small profits rate, but the associated companies rules may still affect other companies in the group. See our article on associated companies.
• Interaction with the holding structure. If you are inserting a holding company, check whether it will be passive or a CIHC. Our article on twelve questions before you insert a holding company covers the checklist.
• Records. Keep evidence of tenants, leases and the purpose of the company.

Talk to us about Holding Company

• A holding company is a decision, not a default
• It lets profits move up tax-free and keeps assets from trading risk
• It can change the corporation tax limits and the reliefs on a sale

See how we help or book a free 20-minute call.

FAQs

What is a close investment-holding company?

A close company that does not exist wholly or mainly for permitted purposes such as trading or letting property to unconnected tenants. It pays corporation tax at the main rate on all profits.

Is a holding company a close investment-holding company?

A holding company whose subsidiaries are qualifying trading companies is generally not. A holding company that mainly holds cash, investments or property let to connected parties can be.

Does a CIHC pay 25% on dividends it receives?

No. Dividends from UK companies are normally exempt from corporation tax whether or not the receiving company is a CIHC. The 25% applies to its taxable profit, such as interest and gains.

Can a property company avoid CIHC status?

It generally does if it lets to unconnected tenants on commercial terms. Letting only to a connected company or to family members does not qualify as a permitted purpose.

Does a Family Investment Company pay 25%?

Usually yes. A Family Investment Company is generally a close investment-holding company, so it pays the main rate. Dividends it receives from UK companies are normally exempt, which keeps the effective rate lower on that income.

Talk to us

If you are unsure whether a company is, or will be, a close investment-holding company, we can review the facts and the options. Book a call for a free 20-minute conversation with our team, or read our service page on the holding company.

Sources

• Close investment-holding companies: https://www.legislation.gov.uk/ukpga/2010/4/section/18N ; https://www.legislation.gov.uk/ukpga/2010/4/section/18A
• Corporation tax rates and limits: https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax
• Marginal relief and associated companies: https://www.gov.uk/guidance/corporation-tax-marginal-relief
• Associated companies and passive holding companies: https://www.legislation.gov.uk/ukpga/2010/4/section/18F ; https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm03945
• Exempt distributions (controlled companies): https://www.legislation.gov.uk/ukpga/2009/4/section/931E
• Loans to participators: https://www.legislation.gov.uk/ukpga/2010/4/section/455