How Small Businesses Can Use Holding Companies To Save Tax

Contents

Key takeaways

What is a holding company

3 reasons you will want to use a holding company

The power of asset protection

Tax advantages of holding companies

Flexibility with business partners

How to create a holding company

Summary

Frequently asked questions

Holding Companies are always a hot topic when tax planning is being discussed but many accountants still struggle to incorporate them into a strategy. Companies House charge £50 to incorporate and can have a company up and running within a couple of days which can make it seem like a doddle.

A point I want to make in this article is that a holding company without the right structure and planning in place can do more harm than good so it’s really important to first of all decide if you need one at all and secondly get the restructuring right so you don’t end up with tax, legal and banking issues which will impact your business.

Key Takeaways

  • Holding companies protect small business assets by legally separating valuable assets from the operational risks of subsidiary companies which can shield those assets from creditors during insolvency.

  • Using holding companies gives you tax advantages such as deferral or elimination of tax through tax free intercompany dividends, the Substantial Shareholding Exemption and strategic use of intercompany loans and Special Purpose Vehicles (SPVs).
  • A holding company structure gives you flexibility in business partnerships and family run businesses to have different income management and wealth extraction strategies, to minimise conflict and to use tax free allowances efficiently.

Before you continue reading…

Our clients enjoy these things as standard:

  • Three working hour response time for queries
  • Fixed monthly payments and any ad hoc fees pre-agreed
  • Full UK based team in the office 9-5 Monday-Friday
  • All-inclusive tax planning and software support
  • Free representation in the event of an enquiry

What is a holding company?

Holding companies come in all shapes and sizes, each with their own structure. Some have one subsidiary, others have a complex web of subsidiaries and parent companies. This gives businesses the flexibility to tailor their holding company structure to their individual needs and goals.

What is a subsidiary?

A company that is part of a larger entity, known as the holding company, is called a subsidiary. Small business owners main trading companies often evolve into subsidiaries which operate under a holding company but can also be an SPV which we’ll cover later.

3 Reasons you will want to use a holding company

Illustration of a businessman protecting assets
  1. Protecting your assets and cash: By putting your assets into a holding company they are separated from the operational risks of the business, a safe haven against potential legal claims or creditor actions. This is particularly important for small business owners who need to keep their personal and business assets safe from any unforeseen business downturns.
  2. Tax advantages: With careful planning and legal structuring they can benefit from various tax advantages such as transferring profits between companies within the holding structure without incurring additional tax. This can result in big savings and a more efficient way of managing the business.

  3. Flexibility when dealing with business partners and family members: By using a holding company you can have different profit sharing, investment decisions and business roles for individual preferences and circumstances which can avoid disputes that can arise from differing objectives or visions for the business.

1. The Power of Asset Protection

Illustration of a tax advantages concept

In business things can change in an instant. A successful business today can be in financial trouble tomorrow due to events beyond its control. When that happens the assets in the business can be at risk from creditors. That’s where a holding company comes in, a safe haven for your hard earned assets.

By setting up a holding company you can separate your assets and liabilities. It’s like putting your valuable assets, such as property, into a safe box and keeping them away from the trouble your trading business might get into. By keeping these assets away from operational risks you’re putting a plan in place to manage those risks wisely.

You can also move cash reserves out of your main business by paying dividends to the holding company, this is then out of reach of any potential creditors.

Shielding Against Business Risks

The main benefit of a holding company is that it creates a clear legal separation between itself and the subsidiaries. If a subsidiary goes into debt, that can’t come back to bite the holding company as creditors can’t go after the holding company for what’s owed by a subsidiary. This is a safe way to keep the holding company’s assets.

There are many reasons to use a holding company structure:

  • Keep important assets or extra cash separate and safe

  • Run riskier business ventures through separate companies

  • Smoother management across the whole group

  • Protection strategies to limit financial risks and liabilities

  • Treat each buy-to-let investment’s subsidiaries as its own entity so only the assets in one pot are at risk if things go wrong

By doing this you look after not just the main holding company but also any subsidiaries that aren’t in trouble if one part of the business hits a rough patch.

2. Tax advantages of holding companies

A holding company isn’t just a safe haven for your assets—it’s also a tax efficient way. Here’s what you get:

And if you decide to sell off parts of your business or wind up a subsidiary there’s something called the Substantial Shareholding Exemption (SSE). This means you won’t have to pay capital gains tax on the profits from the sale. That’s more money in your pocket for your next business venture. Let’s look at how these tax benefits work when you’re running a holding company and its subsidiaries.

Franked Investment Income (tax free dividends)

Subsidiary companies can pass dividends to their holding company without tax, which allows for smooth profit transfers within the group. By passing profits up as dividends subsidiaries can effectively contribute to a consolidated pot of funds at the holding company level.

This pot can then be used to fund various group activities, whether it be to reinvest into the business, fund new ventures or distribute shareholder dividends. The ability to move profits without tax implications gives you a lot of financial flexibility and can be a powerful tool in corporate strategy and financial planning.

Intercompany Loans

Within a holding company structure intercompany loans are a way to move tax efficient cash around. These transactions allow the flow of funds between the holding company and its subsidiaries without tax.

Note that when a holding company lends to a subsidiary it’s safer than between subsidiaries. If things go wrong with the subsidiary that owes the loan then creditors can try to seize this outstanding loan as an asset or debt.

3. Substantial Share Holding Exemption

The SSE, or Substantial Shareholding Exemption, is a key part of your tax strategy. This exemption allows companies to sell significant shares in another company without paying corporation tax on the gain from the sale, provided they meet certain conditions. These conditions are that the selling company must have held at least 10% of the shares for at least 12 months in the 6 years prior to selling their investment.

When you sell a business entity capital gains tax can be a big barrier. Using the SSE means you can use all the proceeds from selling your business to fund your next venture without tax.

A holding company structure can give you tax benefits by reducing Corporation Tax, Capital Gains Tax and Stamp Duty Land Tax – effectively limiting the overall tax on your business.

Special Purpose Vehicles (SPV’s)

Special Purpose Vehicles, or SPV’s, are a type of subsidiary that can be part of a holding company structure. They often hold assets like properties. A holding company can lend to an SPV which then uses it as security for property loans. This can make use of the holding company’s strong balance sheet and create further tax savings.

Why offshore holding companies are a bad idea

Setting up a holding company in a country with a lower corporation tax rate than the UK might seem like a good idea. But these tactics are seen as aggressive tax planning and may be disallowed by the tax tribunals. Avoid offshore holding companies unless you actually live in that other country.

These companies might seem attractive because of the lower tax but remember that benefit may be offset by the risk of legal challenges and higher overall tax costs.

3. Flexibility with Business Partner

Illustration of business partners with flexible arrows

Running a business with partners can be tricky, especially when it comes to sharing the profits. Disagreements can arise when one partner wants to take more money out of the business than the others. Since dividends are paid out based on the type of shares you hold you’re often stuck with a take-it-or-leave-it situation with your business partner.

A holding company can be the answer to these problems. It gives each partner the freedom to decide how and when they get paid. This can smooth over any potential disagreements and allow each person to manage their own finances while keeping the business relationship even.

Management Fees

Management fees. A holding company can extract profits from the trading company and create a new way to distribute benefits. These fees are taxed in the holding company but can give tax relief to the trading company.

This is flexible which is useful when business partners have different views on benefits like company cars and pension schemes.

In a 50:50 owned business it’s also possible to reduce the overall corporation tax rate as the individual holding companies can be in a lower threshold than the main trading company if it was taxed on all it’s profits.

Family

For family run businesses holding companies are a good idea. They allow you to share the income among family members who are part of the business so everyone can use their tax free allowances and stay in lower tax brackets.

So everyone gets their fair share of the profits and the family can keep more of what they earn by being tax smart.

How to create a holding company

Now that you know the benefits of a holding company structure you might want to know how to set one up. It starts with swapping shares from your current business for shares in a new holding company – a share-for-share exchange. This type of exchange would normally bring capital gains tax or stamp duty costs but there are specific tax reliefs to avoid these charges.

Relief from capital gains tax is obtained under Section 135 TCGA 1992 and from stamp duty under S77 Finance Act 1986.

To make sure everything is legal you’ll need to get clearance from HMRC before you start. The rest of the process is standard paperwork: stock transfer forms, board resolutions, shareholder agreements and updated company documents like articles of association and confirmation statements.

Although setting up a holding company can be complicated the long term benefits like financial protection from capital gains and other perks make it worth it.

Summary

A holding company is a good idea for small business owners who want to protect their assets, save tax and have more control over their business. It’s like a safety net that keeps your most valuable assets safe if your business gets into financial trouble while also giving you clever ways to manage your money and reduce your tax bill.

As we reach the end of our holding company guide remember every business is different. What works for one may not work for another so always get advice from the experts. With proper planning and the right strategy a holding company could be just what takes your business to the next level.

Frequently Asked Questions

What is a holding company?

A holding company is a parent company that owns enough shares in other companies to control their decisions and management. But it doesn’t get involved in the day to day business. This separates your valuable assets from the companies.

What are the main benefits of a holding company?

The main benefits are asset protection, tax benefits and flexibility with business partners.

How does a holding company protect assets?

A holding company protects assets by legally separating them from the operational parts of the business so they are safe if the company gets into financial trouble. This separation acts as a buffer so the assets held within the holding company are insulated from any legal disputes, bankruptcies or creditor claims that may arise within the operational entities. In effect it creates a corporate veil that’s hard for creditors to pierce so the assets under the holding company are protected and the integrity and value of the assets is maintained. Isolating assets in this way is good risk management for small business owners who want to preserve their wealth and secure their financial future.

What are the tax advantages of a holding company?

Companies can use holding companies to get tax benefits which include the substantial shareholding exemption, exemptions on dividends received, intercompany loans and special purpose vehicles. These benefits reduce tax and increase profit.

How do I create a holding company?

Setting up a holding company is a simple share for share exchange where you swap your current business shares for shares in the new holding company. Make sure you get the tax reliefs to avoid unnecessary charges. You’ll need to dot the i’s and cross the t’s on all the paperwork and get HMRC clearance.

Paying attention to these steps is essential for a smooth setup of your holding company.

Share this post

Scroll to Top

Get Your Free Guide

Your Guide To Limited Company Tax & Finances

Search a topic or subject

Search