Why Holding Companies Are a Useful Tax Planning Tool


Well, a lot of business owners have heard about holding companies but I haven’t seen a lot of content out there, which really explains what they do. So a holding content, sorry, a holding company is essentially a company where it can hold the shares in your main business.

So, most business owners out there they will own shares in the business themselves. So they might have a limited company and they might have a hundred shares in that limited company. What I’m suggesting is when you have a holding company, the business owner then owns all the shares in the holding company.

And then the holding company then owns shares in that business and I wanted to explain in this video why it’s quite important to do that. But it’s not always important. So, I’ll give you a scenario; let’s say you’re running a business with a business partner and you’re running it as a limited company.

Well, you might have other things going on in your finances, right? And you may be trying to be tax efficient. So you may have said, okay, well, this year, I don’t want to go over 50, 000 in income because I don’t want to pay the high rate of tax. I don’t want to lose my child benefit. That’s fair enough. But let’s say you’ve got 30, 000 coming from other sources.

That means you can only have 20, 000. pounds coming from this limited company you own with your business partner before it pushes you into the higher rate of tax. But in another scenario, on the other side your business partner might have no other income, but they want to earn 50, 000 pounds before they paid the high rate of tax.

And when they want to earn 50, 000 pounds and you’re equal partners in that business, if they want to earn 50, 000 pounds for that business, you’ve got to earn 50, 000 pounds for that business. So now you’ve got a conflict – you only want to take out 20 so you don’t get pushed into high rate. They want to take out 50 before they get pushed into high rate.

So who’s going to win? Do you limit them to 20, 000 pounds of income, which they’ll be unhappy with and then they’ll waste a lot of their basic rate, or do you take the hit and have an extra 30,000 more than you wanted and then pay the high rate tax on it? Plus, lose your child benefit. Interesting. Okay.

Well, the solution here is to have a holding company. So if you go and set up a holding company and then you do what we call a share to share transfer share for share transfer, then actually you can move the shares move your shares that you own in your trading business into your holding company without having to pay any capital gains or stamp duty on it.

But what that means is then you own the holding company, then the holding company owns half of this other company. So now what happens is you can oblige your business partners requests and you say, okay, well, you want to take out 50, 000. Let’s say the business made enough money to pay that out in salary and dividends.

You want to take out 50, 000. No problem. I’ll take the 50 as well because what will happen is Your 50, 000 is going to go straight out to you, and you’re going to pay the basic rate tax so that You’re not going to get pushed into the high rate. My 50, to get paid out into my holding company, and my holding company is then only going to pay out 20, 000 to me, and I’m going to leave 30, 000 of retained earnings in my holding company, and that means that down the line, if I want to invest it some other way, like maybe through an SPV, or to buy rental properties, or if I want to pay it into my pension at a different point, or if I want to just take it at another time I can do that at my leisure and pay the tax when I decide to pay it rather than just be forced to pay the high rate tax, which would happen if I didn’t have the holding company. And that’s the win scenario where you’ve got a business partner with other objectives different to yours and that happens a lot.

And that’s where we really use a holding companies where you’ve got businesses out there, multiple partners, but they’re not family members. Usually with a husband and wife, it’s not as applicable because a husband and wife, it’s quite straightforward to be able to split the income while naturally split the income, not artificially split it.

But it’s straightforward to structure the income. So the husband and wives tend to have the same amount, each anyway, but wit businesses where you’ve got multiple partners, then there’s varying tax objectives and the holding company can really be a really good tool to help you help you take money out of the business without paying tax on it at unfavourable rates, and then deal with that money when the time is right for you.

And that’s why people use holding companies. Alright, if you found this video useful, remember to like, share, follow subscribe, check out our website, you can get in touch with me there as well and book a call and I’ll see you in the next video.

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