Why You Need to Consider a Linked Investment Holding Company
- Omar Aswat
- Apr 22, 2024
- 7 min read
In the world of finance, there are various structures that business owners and investors can leverage to achieve their financial goals.
One such structure gaining traction is the Linked Investment Holding Company (LIHC).
A Linked Investment Holding Company (LIHC), otherwise known as a Personal Investment Company (PIC), can be introduced when business owners are planning to start utilising the excess profits and surplus cash within their trading business(es) to explore investment opportunities outside of normal operations.
I usually see business owners exploring the property market although in more recent months, I have had chats with younger entrepreneurs looking at investments like Crypto. And this still works!
So, in this blog post, I’ll delve deep into the essence, benefits, and practical considerations of integrating a linked investment holding company into your investment strategy, highlighting the holding company structure as a pivotal component for savvy investors and business owners alike.
Table of Contents
What is a Linked Investment Holding Company (LIHC)?
A linked investment holding company acts as a parent company controlling other businesses through significant shareholding.
It creates a diversified group structure, often spanning multiple sectors, providing stability and strategic advantages across various industries.
How Linked Investment Holding Companies Work
The holding company structure allows for a strategic layer of management and financial efficiency.
A holding company controls subsidiaries through share ownership, providing strategic oversight without managing daily operations directly.
This separation provides limited liability, shielding the parent company from financial losses or legal challenges faced by the subsidiaries.
Furthermore, this structure facilitates tax planning strategies by allowing income, dividends, and capital gains to flow through the holding company, potentially reducing overall tax liability.
Key Benefits of Investing in a Linked Investment Holding Company
A linked investment holding company offers benefits including operational flexibility, tax advantages, risk reduction, and strategic growth opportunities.
Let’s first explore the problem a linked investment holding company solves before discussing its benefits.
Holding company Works
PROBLEM
Funds are parked within TradeCo(s). With certainty, it would be disastrous to begin purchasing properties within the same entity for multiple reasons, both from a commercial and tax perspective.
It is undesirable to “mix” the trading activity in the main business with investment pursuits, in the same corporate entity or group with one out of many reasons being losing of valuable reliefs (continue on for more specifics).
Elsewhere, drawing the funds into a personal capacity will give rise to massive dividend taxes of up to 40%, even before a single penny has been invested! Notice the tax leakage with this.
Many BTL landlords move properties into Ltd companies, yet you extract funds personally, pay high taxes, and buy privately.
There are always better ways...
SOLUTION
A holding company structure with an LIHC or PIC helps business owners achieve their goals tax efficiently.
[Note: a HoldCo is not entirely necessary although this needs to be reviewed]
Key benefits and advantages of this structure include:
The structure ensures that the resulting investment activity will be protected from commercial risk in the operating company (and vice versa).
The implementation of a LIHC will allow you to transfer surplus cash from the trading group to the personal investment company which will sit outside of the trading company or trading group.
Under this structure, cash can be regularly extracted from HoldCo to LIHC completely tax-free via dividends. This cash can then be invested into new ventures as planned for.
The transfer of excess cash and isolating future non-trading activities from HoldCo would mean that a number of tax reliefs may be preserved, including business asset disposal relief (BADR) for capital gains tax and business relief (BR) for inheritance tax.
When it is time for owners to look at an exit from the operating business (either individually or collectively), having a LIHC in place can provide flexibility over how and when they extract their sale proceeds and, consequently, how, when (and if), those funds are subjected to taxation.
Last but not least, the ownership of the LIHC can be different to that of the trading group. This will afford the owner a chance to introduce other members of their family, and thereby to access the additional taxation reliefs and allowances applicable to those other individuals.
Considerations Before Investing in a Linked Investment Holding Company
While the advantages are compelling, there are important considerations to keep in mind when evaluating the potential of investing in or setting up a linked investment holding company.
Understanding the Risks
Despite the benefits of limited liability and risk management, investing through a holding company structure is not without its risks.
Market volatility, regulatory changes, and operational challenges within subsidiary companies can impact the overall performance and value of the holding company.
So you need to conduct thorough due diligence and consider the financial health, industry position, and growth prospects of the subsidiaries and the holding company itself.
The Importance of Due Diligence
Like earlier said, before investing in or establishing a linked investment holding company, conducting comprehensive due diligence is crucial. This process should assess the legal, financial, and operational aspects of the holding company and its subsidiaries.
Assessing tax implications, legal costs, and management expertise is crucial for an informed holding company investment decision.
Regulatory and Compliance Aspects
As a potential investor, you must also consider the regulatory environment and compliance requirements related to holding companies.
This involves understanding corporate governance, tax reporting, and legal responsibilities of owning and operating a holding company and subsidiaries.
Navigating these regulatory landscapes requires careful planning and often the guidance of legal and financial professionals.
Best Tax advisor in UK
How to Set Up a Linked Investment Holding Company
If you are considering the strategic move of investing in or setting up a linked investment holding company, the journey begins with informed decision-making and strategic planning.
Some important steps to take would be;
Step 1: Assess Your Financial Needs
Evaluate your investment goals, portfolio, and how a Linked Investment Holding Company can benefit your financial objectives.
Step 2: Choose the Right Company Structure
Based on professional advice and your goals, select the best structure for managing your investments, taxes, and legal obligations.
Step 3: Consult Financial Experts
Seek professional guidance to clarify your obligations, optimise tax strategies, and ensure compliance with UK regulations.
Step 4: Register Your Holding Company
Officially register your chosen company structure in compliance with UK regulations, setting the foundation for your financial management.
Step 5: Open a Separate Business Bank Account
Establish dedicated bank accounts to separate your personal finances from the company’s assets, improving clarity and legal protection.
Step 6: Transfer Assets Strategically
Carefully transfer assets into your holding company, considering legal requirements, tax implications, and financial goals.
Step 7: Continuous Management and Adjustment
Regularly monitor your holding company’s performance, adapting your strategy as needed in response to market or regulatory changes.
Tax Implications On A Linked Investment Holding Company In UK
A compelling reason to consider a linked investment holding company is the potential for tax benefits.
These entities optimise tax liability using strategies like income splitting, tax deferral, and lower corporate tax rates or exemptions.
A holding company framework optimises income tax, capital gains, and dividends, potentially leading to significant tax savings.
Tax Deferral on Capital Gains: In some cases, an LIHC may allow for deferring capital gains taxes on the sale of investments within the holding company structure. This can be particularly advantageous if you plan to reinvest the proceeds from the sale into other assets within the LIHC.
Flexibility in Dividend Distribution: LIHCs provide more flexibility in structuring dividend payouts. The holding company can choose to reinvest profits back into the subsidiaries for growth or distribute dividends to shareholders with minimal tax implications compared to directly owning the subsidiaries.
Estate Planning Advantages: LIHCs can be a valuable tool for estate planning. Transferring ownership of the LIHC to heirs can be a streamlined process compared to transferring individual assets. Additionally, the LIHC structure may offer tax benefits for beneficiaries inheriting the holding company.
The Future of Linked Investment Holding Companies
Trends and Predictions
The landscape for linked investment holding companies is evolving, driven by global economic trends, technological advancements, and regulatory changes.
A key trend is the increasing use of technology and digital platforms for business operations, enhancing efficiency and opening new investment avenues.
Additionally, there's a growing emphasis on sustainable and socially responsible investments, with holding companies playing a pivotal role in directing capital towards green technologies and initiatives.
Holding Companies Investment
Predictions for the future include a rise in cross-border investments, as holding companies leverage their global networks and financial resources to tap into emerging markets and sectors.
Furthermore, regulatory frameworks are expected to evolve, potentially impacting tax planning strategies and corporate governance practices. Investors and business owners should stay informed and adaptable to these changes to maximise their strategic advantage.
Conclusion
A linked investment holding company benefits investors by providing diversification, risk management, and tax efficiencies.
It enables strategic growth and unique investment opportunities, making it a valuable financial tool.
With careful planning, its tax benefits and limited liability help stakeholders succeed in a competitive market.
Hope you found this useful. And if you have any questions or need the help of a professional guide, then feel free to reach out to us at ASWATAX.
To your success!
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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