This is a question we get asked a lot by our clients. There are also a lot of different variables that can impact the answer, so we have tried to give a variety of benefits and examples. The key thing is understanding what the business owner is trying to achieve. Read on to understand more about what a holding company is, the advantages of setting one up along with some potential disadvantages.

What is a holding company?

A holding company is a business that deals specifically with business assets, investments, and management. It typically will not produce any goods or services itself. The main purpose of a holding company is often to ring fence assets from a trading company or to setup a group structure which is more flexible for investment or sale of a trading business.

It is a common misconception that setting up a holding company and a group structure is not suitable for SME companies. In reality, there are a wide variety of advantages.

Advantages of a holding company ⬇️

1. Reduces risk - if you were to set up new companies that were not successful it would not impact your current trading companies as it would be a separate     trading entity. Allowing you to take business risks but protect your existing companies.

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 E.g. You have a trading company selling toys. You want to set up a separate business manufacturing the toys. By putting in a holding company and having a separate Toy Selling Co and Toy Manufacturing Co you can keep the businesses separate. If the new manufacturing business was to fail.For example, shipping costs increase significantly or other economic changes, the holding company and Toy Selling Co can continue to trade and won't bring those companies down with it.

2. Protect assets - if you were to invest in properties / premises or hold intellectual property you could hold that in a holding company and keep it separate from trading companies.

E.g. If you were looking to buy a premises you could set up a holding company and purchase the property here. If the trading company was to become at risk or vulnerable, the property is in a separate entity and therefore protected.

3. Build an investment company - if you were to hold assets separately it allows you to sell off the trading business whilst maintaining the assets.

E.g.  Your business could operate from a premises owned by the holding company. The trading businesses could be sold but maintain ownership of the premises through the holding company. The sale of businesses by the holding company will generate surplus funds to invest in further properties. There is potential the sale will generate no tax if SubstantialShareholder Exception is available (if a company owns 10% or more of a trading company and sells the shares, the gain can be exempt from Corporation Tax).

4. Tax benefits - by setting up a group structure you can benefit from group corporation tax relief. You can also pass cash and assets around the group with no tax implications. There are also other tax efficiencies with Capital Gains Tax and Stamp Duty Land Tax.

E.g.If you have a trading company which is making a profit and paying tax. You have also set up a new company which is in its infancy and loss making. You can surrender the losses from the loss making company to profit making company to offset against taxable profits.

5. Centralised cost centres - if you were to expand your portfolio and have numerous trading business you could benefit from having centralised functions e.g. Accounting, Marketing, HR that can sit in the holding company but recharged to the trading entities.

E.g.  Each individual trading company would not need to have its own functions listed above. Centralising these through a holding company would reduce the administrative load and cost to each individual company

6. The ability to create more flexible share structures – having a basic share structure can limit the flexibility of how dividends can be paid and tax planning opportunities.

E.g. If you have different shareholders within a trading company you may have to take fixed dividends, limiting tax planning opportunities. By having a personal / family-owned holding company sat above this company, you can create tax planning opportunities and have more flexibility of when to take dividends.

7. The ability to build up cash in the holding company to invest – a holding company can invest in other businesses and property, not just trading companies you wish to set up.

E.g.If you want to hold investments personally, you must pay tax first to extract the funds. If you invest from the holding company, you can invest the full amount and build a portfolio of investments in the holding company.

8. Succession planning – introducing a holding company is a good way to start bringing in minority shareholders when looking at handing the business to the next generation.

E.g.You could take this opportunity to bring family members into the share holding to allow for longer term tax planning including inheritance tax planning.

9. Lenders may consider the financial strength of a holding company more so than an individual subsidiary company. -They consider the shares owned by the holding company as intangible assets that can be easily transferred to them in case of a default by the holding company, therefore, can offer loans at a lower rate of interest to the holding company than to an operating company. Thus, the holding company can obtain a loan and distribute the funds to the subsidiary. 

Disadvantages of setting up a holding company

🚀 A holding company – subsidiary company structure would increase the cost and administrative burden compared to a single entity set up.

🚀 The initial set up cost would not be inexpensive. However, with the long-term tax planning efficiencies available and the correct advice this can be mitigated long term.

🚀 Depending on the structure you may not benefit from Business Asst Disposal Relief on selling off parts or all of the company(the benefit of BADR is you pay tax at 10% on the first £1m of capital gains). But Substantial Shareholder Exception may be available (if a company owns 10%or more of a trading company and sells the shares, the gain can be exempt fromCorporation Tax).

Summary

There are clearly pros and cons in setting up a holding company, it all comes down to planning and understanding the desired outcome a sit can be complicated to reverse.

We have the team in place to understand your end goal and suggest the best structure for you, your family and your business going forward.

We can help incorporate the new companies required and setup the desired structure and compete the compliance work going forward to support the group.

If you want to know more, please reach contact Tom South one of our Client Finance Directors on tom@gravitate.digital.

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