Have you ever wondered why some people have holding companies for their businesses? The answer is tax planning. If a husband and wife both earn the same amount of money from their business, they don’t need a holding company because they can earn the same amount to use up their personal allowance before they reach the high rate tax. However, if two friends are running a business together and one of them has other forms of income outside the business, they might want to take different amounts of money out of the business to avoid being pushed into the high rate tax.
It’s important to note that tax is paid on company profits, as well as when money is taken out of the business. So if one person wants to take out £30,000 in dividends and the other wants to take out £50,000, but they have the same type of shareholding, they both have to take out the same amount. This is where a holding company comes in. With a holding company, both parties can pay a £50,000 dividend each into their holding companies, which is tax-free between the holding company and the main company. Then, one party can take the full £50,000 out of their holding company, while the other can choose to take out only £30,000 to avoid the high rate tax and leave the remaining £20,000 in their holding company.
In summary, holding companies are useful when people have different tax objectives but have to take out the same amount. A holding company acts as a barrier, allowing individuals to leave money in their holding company to avoid unfavorable tax rates. If you’re in a situation like this and need more information, it’s worth reaching out for help.