When a company is in it’s infancy it often takes the most simple form possible. In the UK that would be in the form of a straightforward limited company owned directly by the individual shareholders but as a trading company grows so too can the complexity of the structure. One popular addition to a company structure is the holding company, which often results in the trading company no longer being owned by individuals but by another company, but what exactly is a holding company? and why might it be useful? In today’s article we’re exploring the concept of the holding company and how it can be used to protect assets and in tax saving strategies.
What Is A Holding Company?
The companies act 2006 provides the following definition of a holding company. “A company is a subsidiary of another company, it’s holding company if that other company:
- Holds a majority of the voting rights in it, or
- Is a member of it and has the right to appoint or remove a majority of it’s board of directors, or
- Is a member of it and controls alone, pursuant to an agreement with other members a majority of voting rights in that company
One of the benefits of a holding company is the degree of separation that can be placed between a business and the legal ownership of it’s assets. By moving the valuable assets of a trading company into a holding company they are protected from anyone who might seek to take possession of them should the trading company run into financial difficulty or have legal action taken against it. In these situations the claimants/liquidators would find it difficult to target any company assets that are not owned directly by the trading company itself.
In today’s digital world this doesn’t just apply to physical assets like equipment and property. Intangible assets such as patents and customer data can also be protected in this way.
If you’re wondering how the trading company can still make use of the assets to undertake it’s day to day activities, it’s common for the holding company to lease the assets back to the trading company. The leasing costs will usually be a tax allowable expense in the accounts of the trading company which results in reduced taxable profits.
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Another reason the holding company could be implemented is because of the potential tax benefits it can bring. The first is that for holding companies that receive dividends from subsidiary companies there is usually no need to pay corporation tax on dividends received. This means that dividends can be paid up to the holding company without incurring any additional tax liabilities. Now you might wonder why this would be beneficial, after all the profits would still be “stuck” within another company structure and when that profit is later distributed to shareholders income tax would still potentially be incurred. This is true but the ability to control the timing and form of distributions can be a very powerful planning tool. Below we will look at an example where the ability to move profits upstream can be very useful from a tax perspective.
Substantial Shareholding Exemption
The other key exemption for holding companies is the ability to apply for a substantial shareholding exemption when disposing of shares in a subsidiary company. To qualify for the SSE the following criteria must be met:
- The holding company must have held at least 10% of the subsidiary’s shares for at least 12 months beginning no more than six years before the disposal
- The company being sold must be a trading company or the holding company of a trading group or sub-group
Overseas Holding Companies
Up until this point we have only considered simple UK group structures where both the holding company and it’s subsidiaries are based in the UK. Of course some structures will consist of offshore holding companies who own UK subsidiaries. In fact you may be familiar with the high profile cases of companies like Google and Starbucks which have made the news headlines but not always for the right reasons.
When a holding company is based outside of the UK this can create some additional opportunities for tax planning.
The biggest opportunity is to simply shift profits offshore before tax has been applied in the UK and move those profits to a country with a lower rate of corporate tax (or better yet a country that doesn’t apply corporate taxes). This is the technique that many will be familiar with if you’ve followed the cases of Google and Starbucks. Typically the holding company based overseas would charge the UK trading company a fee each year that would reduce the UK trading company’s profits and subsequent corporation tax liability. The overseas holding company may then be taxed on it’s income but usually at a lower rate than would have been the case in the UK. These intercompany charges can take a number of different forms but some common examples include:
- Management charges – The holding company invoices the subsidiary for administration expenses throughout a period, this could include a share of head office running costs, staff costs etc
- Interest charges – The holding company lends money to the subsidiary and then charges interest on the outstanding loan balance
- Intellectual property fee – The holding company charges the subsidiary for the right to use the brand and it’s intellectual property
Setting Up A Holding Company
If you are considering introducing a UK holding company to your business structure then you’ll be pleased to know the process is relatively straightforward and would typically involve two key steps:
- The first step is to form the new holding company. This would involve the same process used when forming any other UK limited company and requires a registration at Companies House. The new company name, details of shareholders and the company’s registered address are some of the details that will need to be provided.
- The second step is for shareholders in the trading company to swap their shares for shares in the new holding company. This is done by way of a share for share exchange and will require the submission of a share transfer form to Companies House. Although technically a disposal of shares in the trading company would have taken place this is usually managed in tax neutral way meaning that no tax would be payable.