We often receive questions about the intricacies of holding companies. These queries typically range from compliance, taxation issues and operational challenges.
In this Tax Tuesday, we break down what a holding company is and highlight six reasons why this uncontroversial, cost-efficient and tax-free reorganisation of your business may prove an attractive trading structure.
What is a holding company?
A holding company is a parent company that typically deals with business assets, investments and management.
Where a business trades as a single standalone limited company, thought might be given to whether it makes commercial sense to put a holding company above the trading company.
In appropriate circumstances, this can be done at low or in many cases no tax cost.
The current shareholders ‘sell’ their shares to a newly incorporated company. The ‘consideration’ provided by the new company is shares issued in itself.
So, in effect, the shareholders still have exactly the same ownership rights which are now through shares in the new holding company, with the trading company becoming a 100% subsidiary of the new company.
6 reasons to choose a holding company structure
- If a company has accumulated cash above its normal working capital requirements or has a valuable asset such as a trading premises, then it may be commercially prudent to look to separate these assets from day-to-day trading risk.
- By putting a holding company above the existing trading company, it is possible to transfer the excess cash/property out of the trading entity into the holding company and so afford them an element of protection. Such assets would remain available for use by the trade as required.
- If the owners are looking to sell the business, then by removing excess assets from the trading entity, this can make the acquisition more affordable and thereby increase the pool of potential purchasers.
- With a holding company and a subsidiary, there would be two boards of directors. Key employees could sit on the subordinate board of directors but not the board of the holding company. The owners can therefore maintain overall control of the business and its assets whilst giving key senior employees an element of status as directors in the subsidiary.
- If the owners are looking to acquire other businesses, then setting up a holding company creates a ready-made structure for the tax efficient acquisition of further trading companies. Such a structure is also very tax efficient if the decision was ever made to sell an individual trading subsidiary.
- Introducing a holding company can be used as a means to buy out a retiring shareholder in circumstances where other methods, such as ‘own share purchases’ may not be appropriate. All shareholders would sell their shares to the holding company; the retiring shareholder would take cash/debt and the continuing shareholders would take shares in the new holding company. This enables the sale to be financed by profits from the business going forward as they arise.
How can we help?
It is very important that your business seeks both tax and legal advice to guide strategic decision-making when it comes to holding companies, to ensure compliance with all relevant regulations and to optimise corporate structure for tax efficiency and asset protection. This comprehensive approach helps mitigate risks and maximise potential benefits, ensuring the long-term success and sustainability of your business.
For further information on holding companies and other business structure matters, please contact your usual relationship principal, email tax@haroldsharp.co.uk or call 0161 905 1616 for more information
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