Starting a Second Business: Subsidiary of a Holding Company or a Sister Company?

You have built a profitable trading company and now want to start something new: another service line, a new market, a property venture or an acquisition. The practical question is where to put it.

There are four common choices:

1. a division of your existing trading company
2. a subsidiary of your existing trading company
3. a subsidiary of a holding company, sitting beside the trading company in a group
4. a sister company that you own directly, outside any group

For most owners the real decision is between the third and the fourth.

How the options compare

• A division gives no separation from the trading company's risks. Funding is simple and start-up losses are used automatically, but a later sale would be an asset sale by the trading company.
• A subsidiary of the trading company gives partial separation. Funding is easy and group relief is available at 75% ownership, but the new business's value is tied to the trading company.
• A subsidiary of a holding company keeps the risks apart. Profit moves up as exempt dividends, group relief is available at 75%, and the holding company can sell using the substantial shareholding exemption.
• A sister company also keeps risks apart, but funding usually comes from money you have already paid dividend tax on, and its losses stay inside it.

Funding the new business

This is often the deciding factor. Inside a group, the trading company's profit can move up to the holding company as a dividend, normally exempt from corporation tax, and the holding company can then lend it to the new subsidiary or subscribe for its shares. No personal tax arises because the money never reaches you.

With a sister company, you would normally take a dividend from the trading company personally and then invest it. For an additional-rate taxpayer in 2026/27, dividends are taxed at 39.35%.

An illustration, not a client example: to put £500,000 into a new venture through a holding company, the trading company pays £500,000 up and nothing is taxed. To put the same £500,000 in personally, the trading company has to pay out about £824,400 (£500,000 divided by 0.6065, ignoring the £500 allowance), leaving around £324,400 in tax. On funding alone, the group structure saves roughly that amount.

The trading company could lend to a sister company directly instead, but then its own cash is exposed to the new venture's risk, and the loan becomes an asset its creditors could look to.

With a sister company, you would normally take a dividend from the trading company personally and then invest it.

Start-up losses

New businesses often lose money at first.

Within a group, losses can be passed between companies as group relief where one is a 75% subsidiary of the other, or both are 75% subsidiaries of the holding company, with matching rights to profits and assets. If the new company loses £80,000 in year one while the trading company pays 25% corporation tax, surrendering the loss saves £20,000 of tax straight away.

A sister company keeps its losses to itself, to carry forward against its own future profits. If it never becomes profitable, they may never be used.

Protecting each business

A holding company subsidiary and a sister company both keep each business's liabilities in its own company. A subsidiary of the trading company is weaker, because value passes between the two and the trading company's creditors could look to its shareholding. A division gives no protection at all.

In every case, protection depends on behaviour as well as structure. Cross-guarantees, loans between the companies and shared contracts can undo it.

Selling one of the businesses

If the new business is a subsidiary of a holding company, the holding company can sell it under the substantial shareholding exemption, provided it has held at least 10% for 12 months within the six years before the sale and the company sold is trading. There is no corporation tax on the gain, and the cash stays in the group to reinvest.

If it is a sister company, you sell your shares personally. Business Asset Disposal Relief can tax up to £1m of lifetime gains at 18%, with 24% above that for higher-rate taxpayers. The cash is yours but taxed now. The £1m limit applies per person, not per company, so two sister companies do not give you two allowances.

If you expect to sell one business and reinvest in the other, the group usually wins. If you expect to sell one and retire on the proceeds, a sister company can be simpler.

Corporation tax rates

Whichever way you hold them, two companies under your control are associated, so the £50,000 and £250,000 profit limits are shared. An active holding company adds one more associated company. The extra cost is capped, and we explain it in our article on whether a holding company increases your corporation tax.

Bringing in other shareholders

New ventures often involve a partner, an investor or key staff.

• If outsiders hold more than 25% of the new company, it is no longer a 75% subsidiary, so group relief and no-gain, no-loss transfers stop. The substantial shareholding exemption still works while the holding company keeps at least 10%.
• A sister company can have a completely different shareholder base, which may suit a partner with no interest in your existing business.

Inheritance tax

Shares in a holding company can qualify for Business Relief where its subsidiaries trade, and shares in a sister trading company can qualify in their own right. Either way, from 6 April 2026 the 100% rate applies only to the first £2.5m of qualifying property per person, across all your businesses.

If you do not have a holding company yet

Many owners reach this question with the trading company owned directly. Placing a holding company above it first, by a share-for-share exchange with HMRC clearance, and then forming the new company beneath it, gives you the group option. That takes time, so start before the new venture needs its first funding.

How to decide

Ask yourself:

1. Will the new business need funding from the trading company's profits?
2. Is it likely to make losses at first?
3. Will it have different shareholders?
4. Might either business be sold, and would you reinvest the proceeds?
5. How closely is it linked to the existing trade?

If the answers to the first, second and fourth are mostly yes, a holding company subsidiary is usually the better home.

Our specialist team prepares the advice, which is reviewed by a Chartered Tax Adviser, and we can run your figures through each option. To talk it through, book a call with our team. Our holding company service page explains how the group structure works.

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

Our specialist practice Holding Company covers group structures and holding company insertions in more depth.