What is a Holding Company?

2 March 2020 Stephen Allender Business Taxes, International Taxes

We regularly advise on of the benefits of creating a group structure via the use of a holding company, but what exactly does this mean and what are the key advantages and disadvantages to creating one?

A holding company is a separate parent company created to own a controlling interest in a subsidiary company or companies.  A holding company doesn’t necessarily trade itself; its main purpose is to form a corporate group. 

An example of a typical corporate group structure is as follows:

 

  Shareholder  
     
  Holding Company  
     
Subsidiary 1 Subsidiary 2 Subsidiary 3

 

There are various reasons why having a holding company in a group structure is more beneficial than having a standalone company. 

 

1. Reduce Risk

One of the main benefits is risk management.  If a company undertakes multiple trades, or has separate investments such as property, then stripping these out into separate subsidiary companies under the common control of a holding company should be considered.  Under a group structure, the risk to the trade of the subsidiaries would be minimised should one part of the overall group perform poorly or become insolvent.  This would not be the case if everything was operated within a single company.

 

2. Asset Protection

A holding company can be used to hold the valuable assets of a business such as property and equipment.  The subsidiaries then take on the daily operations of the business and its trading responsibilities.  The assets held can be leased to the subsidiaries but should be protected from creditors and other liabilities that the subsidiary companies may incur.

 

3. Tax Benefits

Dividends can pass between the subsidiary companies and the holding company without incurring tax charges.  Furthermore, tax exemptions available mean that where a company owns more than 10% of the shares in another company and sells those shares, there is usually no tax to pay on any gains arising.

 

4. Shared Costs

There may be admin and central services functions that are utilised by different businesses.  These can sit naturally within a holding company, which then makes charges to the subsidiaries so that the costs are shared appropriately amongst them.

 

I want to understand the benefits of a Holding Company?

It is important to obtain advice when considering the use of a holding company to avoid any surprise tax charges.  Shorts can assist with this by planning the transactions necessary to change the structure, contacting HM Revenue & Customs to obtain the necessary clearances and ensuring that the transactions do not trigger any Capital Gains Tax or Stamp Duty charges by taking advantage of various exemptions and reliefs available. 

To find out more about how we can help, please do not hesitate to drop our tax team a line and begin your journey with us today.

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