Benefits of a Holding Company Structure: Protect Assets & Save Tax
- Omar Aswat
- Apr 9, 2024
- 6 min read
Table of Contents
Introduction: Why Set Up a Holding Company Structure?
Inserting a holding company above a trade offers many commercial and tax benefits.
If you prefer to understand through a short video, then click the link below. If you are the reader-type, then please continue here!
This article will focus on the insertion of a UK holding company from an owner-managed business perspective. I intend to produce a seperate article which discusses a holding company from an offshore perspective.
Commercial Benefits of a Holding Company Structure
I speak to business owners daily, each with unique goals and future plans. Some businesses will have large amounts of cash reserves built up that are sitting (doing nothing) on the balance sheet. Others will have valuable assets such as trading premises or IP.
I often see owner-managers wanting to use funds to explore new opportunities, like investing in commercial or residential property. End of the day, as we say, the funds are just sat there lounging.
I usually see intentions with building a residential property portfolio but have also had cases with stocks and shares, and with the newer generation online businesses with younger business owners, crypto.
Protecting Valuable Assets
From a commercial perspective, valuable assets on the balance sheet are vulnerable to potential litigation.
I recently met a woman needing inheritance tax advice and mitigation strategies.
Real-Life Example: The Cost of Not Having a Holding Company
During conversation, she mentioned that she previously ran a profitable trading business and the greatest mistake she made was not to introduce the holding company earlier (which, when put into the grand scheme of things is extremely beneficial as you will come to know).
Litigation hit her trade, and authorities seized all of the valuable assets, including properties unrelated to the trade!
Safeguarding Assets with a Holding Company
By way of inserting a holding company, you are introducing a seperate legal entity. The business transfers valuable assets into HoldCo for safeguarding. Even before considering tax benefits, this offers business owners significant relief.
Another two businesses come to mind where their trade has been under attack. Of course, not always becomes the case; however, we are talking from a peace of mind perspective which we can't really put a price tag on, right?
I currently have a client we done some other work for who has £1.2m sat in the company bank account (maybe more now - this was a couple months ago). I explained the situation, but he continues to call me every other week, stressing and worrying about the funds, asking, "What shall I do?"—yet he still takes no action! (Although my understanding is he will very shortly)
The final structure is effectively new HoldCo owning 100% (usually) of the trading subsidiary(ies). Just keep in mind that you need to consider stamp duty at 0.5% separately, and we can work to eliminate it, depending on the circumstances.
Another commercial benefit is that if your business has multiple trades within the one existing company, it is extremely easy to seperate them out, again in seperate legal entities all owned by the one HoldCo (which the original shareholders will then own).
Any new acquisitions made can reside in their own separate corporate entity under the holding company. This allows you as the business owner to keep each trade/business/property investment de-risked from one another. This immediately becomes relevant for expansion plans!
Tax Benefits of a Holding Company Structure
Moving swiftly onto the tax benefits:
• Under the mentioned group structure, cash can be regularly extracted from TradeCo(s) to HoldCo tax free via dividends. This cash can then be re-invested for trade purposes, transferred to an investment company (this depends) or retained in HoldCo for safekeeping. A new UK holding company would allow the safeguarding of personal wealth, outside of any bank or creditors’ charges which may apply to assets held within the subsidiary companies (as discussed). Transferring surplus cash to HoldCo can also significantly reduce the likelihood of creditors making claims against these companies.
Preserving Trading Status for Tax Efficiency
You can preserve the trading status of a company from a BADR position for CGT and BR for IHT—VERY IMPORTANT!
• Where a group exists for loss relief and capital gains purposes (which would be the case following the restructure), it is possible to use losses generated in one company to offset against profits in another group company. Furthermore, where the rules for capital gain groupings are met, assets can be transferred between group companies on a nil gain/nil loss basis (tax free) for corporation tax and stamp duty land tax, such as properties for example.
Tax-Free Gains with SSE
• If you have plans to exit at some point in the near future, then if new HoldCo sells the shares it holds in a trading company, it may also benefit from the Substantial Shareholdings Exemption (“SSE”) which is an extremely valuable tax relief. The UK tax legislation allows for tax free disposals of shares in a trading company, subject to certain conditions being met. To provide some context, if any of the subsidiaries were sold to a third party buyer for say £1m, you would most likely pay tax at CGT rates of 20% (tax due of £200k) and 10% if BADR were to apply (tax due of £100k).
However, if the holding company structure was in place and the holding company sold the shares in its trading subsidiary to the buyer, subject to all the conditions being met, the full share sale would be exempt from corporation tax. This means that you would have (following our hypothetical example) the full £1m of cash from a sale in your holding company.
Of course, with this point, we still have the extraction problems of funds from HoldCo that would then need to be considered (a great problem to have by the way in case you were being too negative!). There are solutions we could explore to move around this or ensure most tax-efficient strategy.
There are further aspects that can probably be discussed but I didn't intend this article to go on for tooo long. Plus I am typing this at currently 2.40am. LOL.
How We Can Help: End-to-End Service
Look. Not intending to hard sell anything. That's not my style. However, after reading this article (and you would have a reason for interest if you have read this far) and you feel this would benefit you, then feel free to get in touch for an initial chat.
I won't mention our fee as it would fluctutate based on circumstances although I would clearly state that we are not the cheapest (and not the most expensive), but we are experts and experienced with this kind of work and will complete thoroughly on a timely basis - whilst understanding ALL the WIDER considerations which I can go into in detail but won't for the purpose of this article (often overlooked by some accountants and advisors and this can be detrimental in the long-run).
Conclusion: Ready to Protect Your Business?
What I would say however is that within our fee, we would look after the WHOLE process which includes the tax aspects, legal fees and Companies House filings to effect the structure. We will also advise on any dividend movements. This means we can service all your needs in one place, without the need to look for external corporate lawyers.
Get in touch when you're ready and we can have the whole thing implemented for you within 6 weeks.
Speak soon
And wish you all the best.
Omar
Meet Omar Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn. Book a call today to learn more about what Omar and ASWATAX can do for you.
*Disclaimer: ASWATAX is a firm of Chartered Tax Advisors, and we strive to provide accurate, up-to-date tax insights. Tax laws may change, so this content is for general guidance only and not a substitute for professional advice. Seek independent tax and legal counsel before making decisions. ASWATAX is not liable for any loss from reliance on this information. Use at your own risk.
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