Do I need a holding company?

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.

Ever wonder where your tax goes? Well, let me tell you

Have you ever wondered where your income taxes go? Well, the good news is that if you have a personal tax account (it's easy enough to obtain one, see here) you can. However, to save you good people the trouble, I went and looked at mine. This is on a percentage basis how my taxes got spent (everyones should be the same):

Description	2017-18	2016-17	2015-16	2014-15	Avg.
Welfare	23.8%	24.3%	25.0%	25.3%	24.6%
Health	19.9%	20.3%	19.9%	19.9%	20.0%
State Pensions	12.8%	12.9%	12.8%	12.8%	12.8%
Education	12.0%	12.3%	12.0%	12.5%	12.2%
National Debt Interest	6.1%	5.5%	5.3%	5.0%	5.5%
Defence	5.3%	5.2%	5.2%	5.4%	5.3%
Public Order and Safety	4.3%	4.2%	4.3%	4.4%	4.3%
Transport	4.3%	4.2%	4.0%	3.0%	3.9%
Business and Industry	2.9%	2.5%	2.4%	2.7%	2.6%
Government Administration	2.1%	2.1%	2.0%	2.0%	2.1%
Culture	1.6%	1.6%	1.6%	1.8%	1.7%
Environment	1.6%	1.6%	1.7%	1.7%	1.7%
Housing and Utilities	1.6%	1.5%	1.4%	1.6%	1.5%
Overseas Aid	1.2%	1.1%	1.2%	1.3%	1.2%
UK Contribution to the EU	0.7%	0.7%	1.1%	0.6%	0.8%

I have shown the percentages for the last four years, and it throws out some interesting results. Largely the biggest shocker is that the percentages stay pretty stable over the four years, although there are a couple of culprits that seem to deviate from the average, principally spending on welfare and national debt interest.

HMRC helpfully also published a paper in November 2018 detailing how much tax they've collected (it can be found here), it really is a great cure for insomnia, I recommend it. However, if you just want to know how much tax the government collects check out page 4. Interestingly the "tax take" has been increasing year on year for some time. To get another idea of just how many different types of tax there are, you could do worse than looking at the Taxpayers Alliance.

I don't intend to draw any political conclusions, that's not my place (I'm a tax advisor after all, not a politician), but I will leave you all with one Brexit related fact though. The median annual income in the UK, according to the most recent Annual Survey of Hours and Earnings, is £28,677 for full-time employees. This means the average tax for an employee is £5,640. So, on average the EU gets £45.12 a year from your taxes...

Tax! What can you do about it?

Yes, I know it is tax return silly season. Yes, I know I should be spending my valuable time filing tax returns. So, why have I decided to write this blog? Well, believe it or not, it has actually arisen from having looked at so many tax returns lately. It never ceases to amaze me that every year I will have clients ask me what they can do to reduce their tax bill. For last year. In January. Oh, how we laugh...

Of course, we all know that the tax year ends on the 5th of April. Your tax return and payment of tax has to be dealt with by the following 31st of January.

Therefore, if I'm helping you file your tax return in January we're already nine months beyond the end of the tax year. So, if you're thinking about making that big pension contribution, or buying that new van, it's a bit late for us to offset it against your tax for last year, unless of course your tax adviser also happens to be Gandalf the Grey.

As with all things, there are of course some clever things we can suggest, like Venture Capital Trust (VCT) or Enterprise Investments Scheme (EIS) investments. Well, we can suggest them, but you'll need an IFA to do them. So, again it's unlikely anything can be sorted out in the dying days of January.

So, the point I'm trying to make (through the fog of a tax return induced migraine), is that rather than wait for the orcs of Mordor, sorry I mean the inspectors of HM Revenue & Customs, to come knocking on your door on the 31st of January you might be better seeking the help of your local friendly tax adviser before they arrive. So, to avoid an invasion of the forces of darkness (HMRC), best have that chat before the 5th of April...

Employment Related Securities - ALERT

I talk a lot about incentivising employees via a grant of shares, usually through the tax-advantaged EMI scheme. Unfortunately, there has been some bad news in the last week or so (and yes, I know I'm a little late to the table on this one, but I've been away on holiday).

According to the latest HMRC employment-related securities bulletin - which can be found here - the EU State Aid approval for the EMI scheme, expired on 6 April 2018.

Before you clasp your head in your hands in dismay, HMRC considers that the State Aid approval applies to the granting of share options and therefore that share options granted up to and including 6 April 2018 won’t be affected by this lapse of the approval.

Good news for all of you with existing schemes and options in place.

Unfortunately, EMI share options granted in the period from 7 April 2018 until EU State Aid approval is received might not be eligible for the tax advantages afforded to pre 6 April 2018 option holders, and accordingly share options granted in that period as EMI share options may fall to be treated as non-tax advantaged employment-related securities options.

However, let us take some solace in the fact that the government has, since last year, been following the process of applying to the European Commission for fresh approval and currently await the Commission’s final response.  We are assured that the government is working hard to ensure this period is as short as possible.

As a result, companies may wish to consider delaying the grant of employee share options intended to qualify as EMI share options until fresh EU State Aid approval has been given. This advice would apply even to existing schemes where new options are being granted.

If you want further advice on this please contact me at Haines Watts.

So, what's your "Exit Strategy"?

As you'll have gathered from my blog back in the spring “Looking for the door?” an "Exit Strategy" is now less and less likely to mean physically selling off your business to a third party. I would argue it's possibly even less likely to mean a management buyout too. To explain why I'll bring you back to a question I've asked before:

"If I sold my business, would the money I got provide me with the same level of income as my business does?"

If it does, then great let's go sell your business and live the dream, that being, of course, a residual income in retirement without all the worry associated with running a business in later life. If however, the truth of the matter is that it won't (especially with ongoing all time low-interest rates) then we need to look at some alternatives.

There is, of course, the tried and tested method of loading your pensions with cash and/or commercial property, but in recent years we've seen the limits on pensions greatly diminished. Not saying it's a bad idea, but it's probably only part of the solution for most. Or one can try to build up a portfolio of assets (investments and property) outside of the business to replace the income your business generates. The problem is, if you're already thinking of exiting your business, it's probably too late to implement such conventional ideas.

Let me throw a Virtual Hand Grenade (or VHA) into the conversation for a moment: How about keeping your business?

We've already established that your business is your greatest income producing asset, so quite simply I ask why are you letting it go? Most businesses, if structured in the right way really don't need you (the business owner) to make them tick. I know this is a very different way of thinking about your business, and for many of us, it is akin to the children leaving home. After all, you've most likely started your business, nurtured it and watched it grow, and now I'm asking you to watch it leave home and head off into the big wide world without you...

BUT, if you have the right people, the right systems, the right structure, and drive all of that through the right incentives then stepping away (without giving it away) becomes easier to do, and you get to keep the income. Sounds like something worth talking about doesn't it? I've helped my clients, friends, and family all re-evaluate the way they've looked at this particular conundrum, and though it will often produce different answers for different people it does help widen their options significantly. If it could work for you, i.e. a business which generates a continued income without that business being dependent on you to drive it, isn't that a conversation worth having?

Looking for the door?

At Haines Watts I talk to a lot of business owners about their options when it comes to exiting their businesses. The traditional thinking has always been to reach a point where they no longer want to drive their business day-to-day and then to sell it to a third party, or possibly even entertain an MBO. They can then take the cash and sail off into the sunset...

However, more and more I find I'm helping to teach them to think about their business and their exit from it in a different way. Essentially this takes a simple change of mindset. Whatever their business or source of wealth is it is merely a tool to facilitate their lifestyle, it is an investment (albeit an investment of their blood, sweat, and tears). I get them to ask themselves this question:

"If I sold my business, would the money I got provide me with the same level of income as my business does?"

More often than not the answer is no, it won't. So, if we take a step back, and look at it in the same way that they would approach their normal business dealings what should they do? With some, the answer is staring them in the face, and they have taken most of the steps they need to already. For others, it's a case of helping them get the building blocks right to allow them to step away from their business. Of course, I am talking about keeping their business and making the transition from director-shareholder (and in some cases general dogsbody) to that of a retired director-shareholder. To put it simply, just because you no longer work in your business 5/6/7 days a week does not stop you from enjoying the profits it generates!

So, how do you do it? Well, I'll save that for another time...

Share the wealth (but keep it in the family)

For many years the typical way for a higher rate tax payer to cut the amount of tax they pay on their personal income has been to transfer shares in their company to their spouse who, for example, may be a non or lower rate tax payer. With many owner managed businesses remunerating the owners through a combination of low salary and dividends this has historically meant paying little to no tax on around the first £80,000 (approx.) for a married couple (or civil partners). This has of course become more important following the changes to the dividend tax regime from 6th April 2016.

It should come as no surprise therefore to learn that HM Revenue & Customs have consistently tried to deter and stop this "income shifting" over the years.  Many of you will no doubt be familiar with the machinations of the Arctic Systems case. However, so far, not much has changed and no new laws have been introduced to tackle income shifting. So if you are considering transferring shares to your spouse as a way to mitigate your personal tax exposure, you may conclude and decide to go ahead with this plan.

BUT WAIT! Read on and explore an even smarter way for you and your spouse (or civil partner) to minimise your joint tax bill.

Selling company shares?

Rather than transferring the shares, your spouse (or civil partner) could in fact buy those same shares from you. How would you fund this, I hear you ask? Well, you could refinance the mortgage on your home and your partner would use the resulting loan to buy shares from you. When you receive the money from your partner, you can use this to repay some of the original mortgage.

So far so good right? Well, there's more, the interest that you would have paid on the original mortgage would not have been eligible for tax relief, whereas the interest on the new loan (which your spouse used for the purchase of shares from you) is eligible for relief against tax.

All of which makes the process of buying shares more tax efficient – you can align income between you and your partner to help mitigate your joint tax bill, and you can claim tax relief on your interest payments! You would even be exempt from paying capital gains tax from selling the shares because the sale took place between you and your spouse (or civil partner).

Of course, nothing is easy and for this to work successfully, there are conditions that you would need to meet and hoops you would need to jump through. Of course, I would say that, I'm a tax adviser aren't I? In all seriousness though, as with most things we can do a DIY job, but would you (like Leonid Rogozov) remove your own appendix? 

Share the wealth (but keep it in the family)

For many years the typical way for a higher rate tax payer to cut the amount of tax they pay on their personal income has been to transfer shares in their company to their spouse who, for example, may be a non or lower rate tax payer. With many owner managed businesses remunerating the owners through a combination of low salary and dividends this has historically meant paying little to no tax on around the first £80,000 (approx.) for a married couple (or civil partners). This has of course become more important following the changes to the dividend tax regime from 6th April 2016.

It should come as no surprise therefore to learn that HM Revenue & Customs have consistently tried to deter and stop this "income shifting" over the years.  Many of you will no doubt be familiar with the machinations of the Arctic Systems case. However, so far, not much has changed and no new laws have been introduced to tackle income shifting. So if you are considering transferring shares to your spouse as a way to mitigate your personal tax exposure, you may conclude and decide to go ahead with this plan.

BUT WAIT! Read on and explore an even smarter way for you and your spouse (or civil partner) to minimise your joint tax bill.

Selling company shares?

Rather than transferring the shares, your spouse (or civil partner) could in fact buy those same shares from you. How would you fund this, I hear you ask? Well, you could refinance the mortgage on your home and your partner would use the resulting loan to buy shares from you. When you receive the money from your partner, you can use this to repay some of the original mortgage.

So far so good right? Well, there's more, the interest that you would have paid on the original mortgage would not have been eligible for tax relief, whereas the interest on the new loan (which your spouse used for the purchase of shares from you) is eligible for relief against tax.

All of which makes the process of buying shares more tax efficient – you can align income between you and your partner to help mitigate your joint tax bill, and you can claim tax relief on your interest payments! You would even be exempt from paying capital gains tax from selling the shares because the sale took place between you and your spouse (or civil partner).

Of course, nothing is easy and for this to work successfully, there are conditions that you would need to meet and hoops you would need to jump through. Of course, I would say that, I'm a tax adviser aren't I? In all seriousness though, as with most things we can do a DIY job, but would you (like Leonid Rogozov) remove your own appendix? 

Incentivise your key players

So, you've built up a successful business, which has grown and therefore necessitated bringing others on board to help you run it. Or perhaps you're nearing retirement, or simply wanting to slow down and let your management team take up the strain, whilst you take time to enjoy the fruits of many years hard work.

Of course, the problem here is how do you ensure that those key people, the one's you'll rely on to keep you business ticking, don't jump ship, or simply decide they could go and run their own business? Well, you could always give them a pay rise, or a bonus, but we all know that is only a short term incentive. How can you truly tie these 'employees' into your business? The answer is simple, give them ownership!

"Whoa, surely you don't mean give away my business?" I hear you cry. Well, you kind of have to, but not all of it, infact only a small part of it, and if you're careful about how you do it you will lose zero control and even only 'pay out' if the business is ever sold. No, I'm not talking about financial wizardry, or being less than honest with your people, I'm talking about share options, or more specifically the Enterprise Management Incentive (EMI) share options.

A share option gives someone the right to buy your company’s shares in the future, but at a price that is fixed now. This means in effect that you are giving away none of the business you have built to date, rather what you are giving away is an option to benefit from future growth. So, if your team do more than sail the same course, and they actually grow your business, then everyone wins!

Options are very useful for business owners that wish to incentivise and retain key employees because as I have already pointed out, if the value of the shares escalates over time those employees could make a significant capital sum when they sell their shares. An EMI share option scheme provides significant tax advantages to those employees (and you as their employer). 

Quite simply, an EMI scheme is by far the most tax beneficial structure for staff, it was introduced in 2000 to assist growing companies in attracting and retaining key employees and to reward those employees for taking the risk to work for such companies.

The principal tax benefit of an EMI share option scheme is that employees do not have to pay the income tax that would normally be charged on the market value of any shares or options granted to them. If you grant shares to an employee in other ways tax would be due on their value. It's also worthy of note that because of the advance agreement available on share values granted under EMI schemes, it is usual to agree discounts of up to 80% of the actual value, which further mitigates taxes.

If employees are given options under an approved EMI scheme, they are only charged capital gains tax at 10% on the increase in value over the option exercise price (what they pay for the shares), so long as that price is at or above the market valuation of the shares on the date of granting the options. This value is agreed in advance with HMRC as part of the process prior to entering into any agreement with the employee.

"All of this is well and good" I hear you say. Yes, it is very good news for your employees (or at least those key ones you want to incentivise).

"So what's in it for me?" you ask. The answer is simple, a team that now has an incentive to run your business well, after all they now have some ownership (albeit a small percentage) and their performance directly relates to their ultimate reward, which might be a business sale, or even a full management buy out. By giving them control of their own financial destiny, your own is assured as you step back from the day to day of running your business. Sounds nice doesn't it...

Dividend Tax: HMRC's smash and grab...

As I'm sure you're aware the much heralded dividend tax comes into force with effect from 6 April 2016.  It will apply to all dividends received in excess of £5,000 per tax year (regardless of whether from listed investments or your own company). All of this means that an average company director taking a modest salary within his personal allowance, and the rest of his income from the company as dividends, will pay more tax in 2016/17 than he did in 2015/16.

This additional tax would be payable, under self-assessment by 31 January 2018, as the balancing payment for that tax year. However, it would seem that HMRC does not want to wait for the extra tax in the Treasury's coffers, and it's solution to improve the nation's cashflow has been to amend the tax codes of many company owner/directors to effectively collect "at source" an estimated amount based on the previous year's returned figures.

The deduction in a client's PAYE code is to be labelled as ‘dividend tax’, and the notes on the P2 (PAYE coding notice) will say: "this is to collect the basic rate of tax due on your dividend income".

The net result of this is that a lot of company owner/directors will suddenly start to see tax being deducted from their salaries (which are typically below the tax free personal allowance). Unfortunately, this is just another underhand smash  and grab by HMRC and the Treasury on the pocket of private business!

You can contact HMRC by telephoning them on 0300 200 3300 or complete an online coding notice query here. Alternatively, although not as quick as the two previous methods, you can write to HMRC at:

Pay As You Earn and Self Assessment

HM Revenue and Customs

BX9 1AS

Dividends, an update...

Following on from my earlier blog on the changes to the taxation of dividends there has been a further update on how those changes are going to apply to all dividend income. HM Treasury confirmed in August via a HM Revenue & Customs factsheet that the £5,000 dividend allowance is actually a zero rate tax band just for dividend income and that it will still form part of the £31,785 basic rate band for income tax purposes, rather than in addition to it as some of us had hoped. HMRC state:

"The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive. Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance."

At present owners of small companies could pay themselves up to £42,385 a year without suffering any income tax (taking into account their personal allowance of £10,500 in 2015/16 as well as the dividend allowance), whereas assuming that the basic rate band and personal allowance remained the same in 2016/17 then the increase in tax would be just over £2,000 as a direct comparison, this is without seeing an increase in their income!

For those extracting in excess of the basic rate band the picture worsens, as currently for every £1,000 extracted as dividend only £250 would have to be paid over to HMRC. From next April with the abolition of the dividend tax credit this will rise to £325. So, for a business owner extracting £100,000 a year from their business the changes to the taxation of dividends will cost a little over £6,300 more in tax than it does currently.

Obviously these are two extremes of looking at how owners of small to medium family companies choose to remunerate themselves, but it is apparent to see that the overall increase in this bracket amounts to a flat 7.5 pence in the pound for any dividends over and above the combined personal and dividend allowances. It is quite easy to see how according to the Government’s estimates, the new dividend tax regime is expected to raise £2.54bn during 2016/17, with smaller, but still significant income flowing to the Treasury in subsequent years!

Dividends? All change...

So, in this month's emergency budget the Chancellor announced the biggest shake up of tax on investment in over a generation. No longer will dividend income for basic rate taxpayers be, in effect, tax free. The 10% notional tax credit that almost all of us have always accepted as a slightly odd anomaly of the tax code is no more, well from next April at least! So, what exactly  does this all mean and how does it affect you, me and all the millions of business owners and investors in the UK?

Well, first of all we have a new £5,000 dividend allowance, which in effect means the first £5,000 of dividend income you receive (be that from your business, or your portfolio) will still be tax free. However, anything over and above that will be subject to 7.5% tax at the basic rate, 32.5% at the higher rate and 37.5% for additional rate taxpayers. As with most changes to the system of taxes in the UK there are various winners and losers as a result.

The is also in addition to the £1,000 savings, or interest allowance that was announced last year. All of which points to government wanting to encourage the small investor in a move away from cash to bolster the financial markets. Well, that is my opinion at least, given that what we are seeing is in effect a tax break for investing in the equities market.


It is possible that investors who have built up sizeable portfolios could be subject to the higher rate. For example, a share portfolio of £125,000 with a yield of 4 per cent will generate £5,000 income a year and use up the dividend allowance. So, we are not talking about something that will affect only the "super-rich" here.

Similarly, for owners of small businesses who have for many a year sought to save tax my taking their remuneration out of their companies as dividend we will see a huge change. Whilst large companies will still be more tax efficient under the new system (although not as efficient as they once were), smaller family businesses may find themselves facing larger tax bills as a corporate entity and the prospect of dis-incorporation looms as a partnership may once again mean paying tax.


So, enough of the doom and gloom, what are the advantages and what can you do to iron out some of the knottier problems:

Maximise your annual tax-free dividend allowance
Each person will be entitled to a new tax-free Dividend Allowance of £5,000 per annum. Married couples (and registered civil partners) should spread their taxable portfolios between them to make full use of each person's allowance.

Make the most of each spouse's income tax allowance and tax bands
It sounds obvious, but married couples should still seek to make full use of their personal allowances and basic rate tax bands, where applicable, so that taxable dividends are paid in the name of the spouse who pays the lowest tax rates.

Defer taxation using an investment bond
Dividend income within an investment bond grows almost free of taxation. Investors only pay tax when profits are withdrawn from the bond, and even then withdrawals of up to 5 per cent of the original capital per year (cumulative) can be taken without an immediate tax charge.

Don't forget your ISA
Taxpayers will see a tax increase of 7.5 per cent on dividend income received above £5,000 a year. This makes sheltering taxable investments in an ISA all the more important as unlimited dividends can be withdrawn from an ISA tax-free.  There is also no capital gains tax to pay in an ISA. Up to £15,240 worth of existing investments can be sheltered in the current tax year.

So what about business owners?
Well, at present the picture is far from rosy, and although the "tax scheme industry" has already rolled up its sleeves to come up with a cunning plan I fear it will end as most of Baldrick's did in disaster for the participants. That said, this is not all bad news, the current system of taxation on dividends has always seemed a bit odd when compared to the rest of the tax code, and for the vast majority will still be preferential to taking a salary. Unfortunately, it really is only those on the fringes of this argument who will see a genuine negative effect and as I've already said dis-incorporation might be attractive, there is after all a £100,000 relief available after all!