Benefits of a holding company

It has been a turbulent time for most companies and now is the time that owner-managed businesses are reconsidering their structure.

I have recently been advising two clients who are looking to implement a holding company structure for two very different reasons. The first is a business in a high-risk industry, its recent success is due to a large contract they took on during the pandemic and they are looking to protect the profits earned to invest in new business ventures.

The second company has struggled throughout the pandemic and has needed to scale back operations. The company’s main asset is its freehold property from which it operates, and the owners would like to separate this asset from the main trade.

A holding company and trading subsidiary

A common group structure for an owner-managed business is that of a holding company and trading subsidiary. The basic principle is that the holding company owns the groups valuable assets, and the subsidiary undertakes the riskier trading activity. The concept is that the trading subsidiary could fail without exposing the assets in the holding company to the creditors or claims. Each company is its own legal entity, and each has limited liability, which should protect assets and limit loss to the group should the unfortunate happen.

Assets can be transferred between the holding company and the wholly-owned subsidiary tax neutrally. In addition, group companies can also utilise the tax losses of other group companies.

Corporation tax exemptions

Subsidiary companies can pay dividends to the parent/holding company and these dividends will generally be exempt from Corporation Tax. This allows the profits from the trading company to be held by the holding company and either reinvested in other business ventures or distributed to the shareholders.

Another advantage of a holding company and trading subsidiary structure is that should the decision be made to sell the trading subsidiary the gain on disposal will likely qualify for Substantial Shareholding Exemption and therefore be exempt from Corporation Tax.

Efficiencies across the group

As businesses grow a group structure could allow synergies across the group, perhaps having the head office and admin function operate from the holding company. The costs of these centralised teams would then be recharged to the subsidiaries for the services utilised, which can save each company having an in house team.

Inserting a holding company above a trading subsidiary is a well-trodden path for advisors. Where there is no change in the overall ownership, the holding company can be inserted via a share for share exchange and implemented without any tax implications for the owners of the companies.

There are many advantages to this structure but once implemented it is no so easy to break up. Get in touch with me, or your usual Kreston Reeves advisor, and we will be happy to discuss the various options with you.