Why set up a holding company group structure?

There are multiple benefits from both a commercial and tax perspective that present themselves when inserting a holding company above a trade.

If you prefer to understand through a short video, then click the link below. If you are the reader-type, then please continue here!

This article will focus on the insertion of a UK holding company from an owner-managed business perspective. I intend to produce a seperate article which discusses a holding company from an offshore perspective.

I speak to many business owners on a daily basis and each will have their own specific goals and plans for the future. Some businesses will have large amounts of cash reserves built up that are sitting (doing nothing) on the balance sheet. Others will have valuable assets such as trading premises or IP.

Regularly, I see owner managers who want to use these funds now to explore new avenues such as investing into commercial or residential property for example. End of the day, as we say, the funds are just sat there lounging.

I usually see intentions with building a residential property portfolio but have also had cases with stocks and shares, and with the newer generation online businesses with younger business owners, crypto.

Going back a little, from a commercial angle, these valuable assets sat on the balance sheet are under attack from potential litigation. Not long ago, I was introduced to a woman who required inheritance tax advice and mitigation strategies that we could implement for her.

During conversation, she mentioned that she previously ran a profitable trading business and the greatest mistake she made was not to introduce the holding company earlier (which when put into the grand scheme of things is extremely beneficial as you will come to know).

Her trade faced litigation and all of the valuable assets were seized, including properties that had nothing to do with the trade!

By way of inserting a holding company, you are introducing a seperate legal entity. Valuable assets are transferred into HoldCo for safeguarding. Without even looking into the various tax benefits I will outline shortly, this already provides a massive sigh of relief for business owners.

Another two businesses come to mind where their trade has been under attack. Of course, not always becomes the case; however, we are talking from a peace of mind perspective which we can't really put a price tag on, right?

I currently have a client we done some other work for who has ￡1.2m sat in the company bank account (maybe more now - this was a couple months ago). I have explained the situation and he continues to call me every other week explaining how he is really stressed and worried about those funds - 'what shall I do?' etc - without taking any action and proceeding! (Although my understanding is he will very shortly)

The final structure is effectively new HoldCo owning 100% (usually) of the trading subsidiary(ies). Just keep in mind that stamp duty at 0.5% needs to be considered seperately and we can work to eliminate (subject to circumstances).

Another commercial benefit is that if your business has multiple trades within the one existing company, it is extremely easy to seperate them out, again in seperate legal entities all owned by the one HoldCo (which the original shareholders will then own).

Any new acquisitions made can reside in their own separate corporate entity under the holding company. This allows you as the business owner to keep each trade/business/property investment de-risked from one another. This immediately becomes relevant for expansion plans!

Moving swiftly onto the tax benefits:

? Under the mentioned group structure, cash can be regularly extracted from TradeCo(s) to HoldCo tax free via dividends. This cash can then be re-invested for trade purposes, transferred to an investment company (this depends) or retained in HoldCo for safekeeping. A new UK holding company would allow the safeguarding of personal wealth, outside of any bank or creditors’ charges which may apply to assets held within the subsidiary companies (as discussed). Transferring surplus cash to HoldCo could also significantly reduce the likelihood of any claims being made against these companies by creditors.

The trading status of a company can be preserved from a BADR position for CGT and BR for IHT - VERY IMPORTANT!

? Where a group exists for loss relief and capital gains purposes (which would be the case following the restructure), it is possible to use losses generated in one company to offset against profits in another group company. Furthermore, where the rules for capital gain groupings are met, assets can be transferred between group companies on a nil gain/nil loss basis (tax free) for corporation tax and stamp duty land tax, such as properties for example.?

? If you have plans to exit at some point in the near future, then if new HoldCo sells the shares it holds in a trading company, it may also benefit from the Substantial Shareholdings Exemption (“SSE”) which is an extremely valuable tax relief. The UK tax legislation allows for tax free disposals of shares in a trading company, subject to certain conditions being met. To provide some context, if any of the subsidiaries were sold to a third party buyer for say ￡1m, you would most likely pay tax at CGT rates of 20% (tax due of ￡200k) and 10% if BADR were to apply (tax due of ￡100k).

However, if the holding company structure was in place and the holding company sold the shares in its trading subsidiary to the buyer, subject to all the conditions being met, the full share sale would be exempt from corporation tax. This means that you would have (following our hypothetical example) the full ￡1m of cash from a sale in your holding company.?

Of course, with this point, we still have the extraction problems of funds from HoldCo that would then need to be considered (a great problem to have by the way in case you were being too negative!). There are solutions we could explore to move around this or ensure most tax-efficient strategy.

There are further aspects that can probably be discussed but I didn't intend this article to go on for tooo long. Plus I am typing this at currently 2.40am. LOL.

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Look. Not intending to hard sell anything. That's not my style. However, after reading this article (and you would have a reason for interest if you have read this far) and you feel this would benefit you, then feel free to get in touch for an initial chat.

I won't mention our fee as it would fluctutate based on circumstances although I would clearly state that we are not the cheapest (and not the most expensive), but we are experts and experienced with this kind of work and will complete thoroughly on a timely basis - whilst understanding ALL the WIDER considerations which I can go into in detail but won't for the purpose of this article (often overlooked by some accountants and advisors and this can be detrimental in the long-run).

What I would say however is that within our fee, we would look after the WHOLE process which includes the tax aspects, legal fees and Companies House filings to effect the structure. Any dividend movements etc will also be advised on. This means that all your needs can be serviced in one place without having to look for external corporate lawyers for example.

Get in touch when you're ready and we can have the whole thing implemented for you within 6 weeks.

Speak soon

And wish you all the best.

Omar