In essence a holding company is where shareholders own one company which then owns another. A common structure could look like this:
A holding company can own multiple subsidiaries but must own at least one subsidiary for it to be called a holding company.
A group structure can be formed at the incorporation stage of the business or can be completed retrospectively providing clearance is obtained from HMRC. Advance tax clearance would ensure that Capital Gains Tax would not fall due on the shareholders when they transfer their shares to the new Holding Company.
Incorporation
If you envisage the business doing well and likely, in the medium to long term, investing in other items that are not directly associated to the trade, then it is cost effective to set the structure as a group from day 1. The holding company would first be formed with a subsidiary second once all of the relevant details have been received i.e. certificate of incorporation.
Myth busting – a holding company does not need to have the word holding(s) in it. In fact you could simply have Company A (being the holding company) and Company B. As long as the company name is available with Companies House there is no restriction.
Retrospectively
If you have an existing business, it is likely that not much share activity has happened especially if it is owner managed or a family run business. If a holding company is required then clearance can be obtained from HMRC. This is usually transacted (but not limited too) as a share for share exchange whereby the new holding company gets the shares in the subsidiary in exchange for a mirrored shareholding in the holding company. E.g. A and B have a 60/40 shareholding in company C. Company D being the holding company would receive the 100 shares in company C but then would issue to A and B shares in D in the same 60/40 split.
Benefits
Broadly, the main reason for holding companies over recent years is to remove valuable or non-trading assets from the trading company. This is for two reasons:
- If a company is looking to sell then having non-trading assets on the balance sheet could affect one of HMRC’s acid tests. If part of the business is sold or key management personnel are introduced as shareholders, then the assets are safeguarded from this change.
- As a risk management measure, to enable valuable assets such as business premises, investment property or surplus cash to be moved up a level and be protected from potential uninsured claims should the main trading company get into future financial difficulties. The three examples can be moved up a level tax free providing certain criterion are met.
Other benefits include:
- Where a structure is created, given criterion again are met, a subsidiary could be sold and the proceeds would be tax free if eligible for Substantial Shareholding Exemption.
- Dividends can pass between the subsidiary companies and the holding company without incurring tax charges.
- To remove assets and devalue the subsidiary if you wish for key management personnel to have a stake in the business or to ultimately succeed you in running the business.
- To enable the business to be floated (egg as an IPO on the AIM market).
Advice should always be taken prior to considering the above and restricting your holdings in corporate entities. HMRC clearance is not a given and will only be granted for bona-fide commercial reasons. Make sure professional advice is sought in advance of a group reorganisation.