A question I’m often asked by SME business owners is whether they should form a holding company. Simply put, placing shares in an existing company into the ownership of a holding company can offer significant tax, legal and commercial benefits.
What is a holding company you might ask? A holding company is a business that exists to deal with the assets of other businesses and to invest in and manage other businesses. They are private limited companies with their own shares, and they normally undertake activities that do not involve the sale of products or services.
So, what are the benefits of creating a holding company:
- Should the situation arise whereby you may have to settle claims or debts from uncertain times of trade, then having a holding company could protect cash and valuable assets, such as property, by ringfencing them from such future claims.
- If you’re entering into a new trading activity that carries an element of risk, then a holding company will allow you to keep this riskier activity contained and partitioned away from existing trading activity whilst still being funded by it.
- Utilising a holding company and possibly a wider group structure allows you to ringfence certain assets to protect them from tax charges. For example, it’ll allow the movement of cash, tangible assets (e.g. property), and intangible assets (e.g. intellectual property) to different entities without incurring any tax charges.
With regard to accumulated cash deposits and investment property, a holding company can be created, and a group formed to allow assets to move within the group.
As for tax, when you exchange shares in your trading company for shares in the new holding company this will avoid a capital gains tax charge. Once the holding group has been formed; group relief and the taxation of dividends received by companies means the movement of the property and cash is achieved without a charge to tax between the holding company and its subsidiaries.
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