Reasons for using a holding company?

[Hubert B]

I have accumulated shareholdings in several private Ltd companies. A range of success levels, some ticking along, some nominally zero value and some looking very promising. Mostly these are companies that I worked for and took some share options, some I started myself and some I invested in.

The other shareholders in these companies are a motley crew with a wide range of business, technical and other experiences. The discussions are interesting! One thing that I notice is an obsession with use of holding companies to establish layers of ownership between the people and the actual active trading companies. In several of these groups it is not questioned, for them it goes without saying that you would not want, in a personal capacity, to actually own shares in a trading company. But it is hard to get a straight answer on why this is the case. Specifically, what circumstances it makes sense and what circumstances it does not. I suspect some are going along with the crowd even though it might make no difference to their specific circumstances.

When I discussed with my accountant he dismissed this practice as a waste of time. Take the gains when they come and be happy to pay the CGT was his attitude (in response to the vague assumption that use of holding companies is related to CGT 'management').

Can anyone comment on when it makes sense to have these kinds of holding companies in place?
What are the negatives of directly holding shares in a trading company?
Are there any actual tax benefits to using an intermediary company?

 

[WaveJumper]

I have always thought of holding companies along these lines as a simple example:

Company A (your company) rents the equipment off company B which is a holding company (your holding company) Company A goes bust owing lots of money creditors cannot touch those assets in the holding company. However you will needed to have put money into the holding company in the first place and be paying tax on anything it earns.

Could be wrong as I am not an accountant or tax advisor.

Holding shares in any trading company have the risk they can go up and down in value. if you are holding shares purely for their dividends that maybe ok and part of your portfolio strategy, at the same time of course the companies could go under leaving you with nothing

I would consider talking to an actual tax advisor

 

[The Byre]

Holding companies outside the UK can very very useful for all kinds of tax and other reasons, such as -

• Avoiding stamp duty on land and buildings.
• Moving profits out of the UK to a low-tax region.
• Making ownership opaque.

Those are some of the reasons that spring to mind - there are others that are more complex.

 

[Paul Norman]

It makes you look well impressive, though.

But, being serious, your accountant is right, for most of us. It creates an expensive complexity which is worth it if the tax planning would bring big gains, or if your business structures are substantial.

I would be listening to the accountant, but checking his sums.

 

[WaveJumper]

It makes you look well impressive, though.

But, being serious, your accountant is right, for most of us. It creates an expensive complexity which is worth it if the tax planning would bring big gains, or if your business structures are substantial.

I would be listening to the accountant, but checking his sums.

At the end of the day you are going to paying someone to do two sets of accounts so my guess is unless there are huge sums of money involved its probably not cost effective for us mere mortals

 

[Mark T Jones]

From experience, group structures are used by:

- Wise people, who undersatnt the financial, tax and risks involved

- Idiots, who think they are smart.

 

[BigDreamer]

Someone correct me if Im wrong, but I believe using a holding company can save you from having to pay higher rates of dividend tax on all dividends you may receive.

For example, if you were to receive dividends of say 400k every year from these companies to yourself personally, you would have to pay the additional dividend tax rate (38.1%) for a large majority of that sum.

However, if dividends are paid into a holding company, you can safeguard those profits there (and potentially use them for other investments) and slowly take out 50k a year in dividends from the holding company and only pay the basic rate of 7.5%.

 

[SillyBill]

I genuinely can't say I understand too much of this but I have made a few acquisitions over the years and on the advice of accountants and lawyers (that I do trust their wisdom) it has generally been done through setting up of new companies and new group structures to minimise my risk and exposure of my assets, properties, other businesses and particularly my main business. So mostly works for slight of hand with debt management/liability and some tax advantages it appears but I'd be lying if I can even follow some of what bounces around with me in copy between my solicitors and accountants. Not quite sure what advantages have been accrued but I've never taken debt on with my main trading companies in name but I know I have used them to fund the loan commitments for other companies up the tree to which have borrowed large sums. So subsidiary extends a repayment loan for a debt held by a parent company. Then dividend in specie of the benefit of loans between the companies etc. I think this sort of stuff can make sense if you have a broad range of assets, some sizeable numbers etc., if you have a cake shop I daresay it would be vanity.

 

[Mr D]

Someone correct me if Im wrong, but I believe using a holding company can save you from having to pay higher rates of dividend tax on all dividends you may receive.

For example, if you were to receive dividends of say 400k every year from these companies to yourself personally, you would have to pay the additional dividend tax rate (38.1%) for a large majority of that sum.

However, if dividends are paid into a holding company, you can safeguard those profits there (and potentially use them for other investments) and slowly take out 50k a year in dividends from the holding company and only pay the basic rate of 7.5%.

You could instead choose to take 50k a year out of the only company you have and pay the same rate.

In your example you are adding to complexity and cost for effectively zero benefit.

Talk to an accountant and get them to help you craft what you are looking for.
Just be prepared to pay - up to you to make the extra costs worth it. Plenty try and apparently don't manage to do so.

 

[Mr D]

I genuinely can't say I understand too much of this but I have made a few acquisitions over the years and on the advice of accountants and lawyers (that I do trust their wisdom) it has generally been done through setting up of new companies and new group structures to minimise my risk and exposure of my assets, properties, other businesses and particularly my main business. So mostly works for slight of hand with debt management/liability and some tax advantages it appears but I'd be lying if I can even follow some of what bounces around with me in copy between my solicitors and accountants. Not quite sure what advantages have been accrued but I've never taken debt on with my main trading companies in name but I know I have used them to fund the loan commitments for other companies up the tree to which have borrowed large sums. So subsidiary extends a repayment loan for a debt held by a parent company. Then dividend in specie of the benefit of loans between the companies etc. I think this sort of stuff can make sense if you have a broad range of assets, some sizeable numbers etc., if you have a cake shop I daresay it would be vanity.

In your case it made business sense to structure as you did. For many small businesses it won't make sense to do it. They just won't have the need for the complexity and cost.

 

[BigDreamer]

You could instead choose to take 50k a year out of the only company you have and pay the same rate.

Assuming you mean taking 50k out of the trading company, that would leave the rest of the profits unprotected if the company gets into financial difficulties.

A holding company which will have almost no liabilities to pay can keep the rest of the profits protected and unaffected if the trading company goes under.

 

[Mr D]

Assuming you mean taking 50k out of the trading company, that would leave the rest of the profits unprotected if the company gets into financial difficulties.

A holding company which will have almost no liabilities to pay can keep the rest of the profits protected and unaffected if the trading company goes under.

What is the risk of getting into financial difficulty?
You realise if the holding company has a problem you lose that way too?

Seems to be complication and cost for moving risk around. The 400k taken out costs you the same personal taxation whether by one company or the other it's from for the same amount.

 

[Maxwell83]

Someone correct me if Im wrong, but I believe using a holding company can save you from having to pay higher rates of dividend tax on all dividends you may receive.

For example, if you were to receive dividends of say 400k every year from these companies to yourself personally, you would have to pay the additional dividend tax rate (38.1%) for a large majority of that sum.

However, if dividends are paid into a holding company, you can safeguard those profits there (and potentially use them for other investments) and slowly take out 50k a year in dividends from the holding company and only pay the basic rate of 7.5%.

This.

The use of the holding company is pointless if the various shares aren't producing a lot in dividends.

But when you're talking about big money, you may not want £150k of dividend income being pushed into your self assessment each year. Especially if you are still working and already taking an income from your 'bread and butter' trading company.

Divdends aren't tax when the shareholder is another limited company, so you get all of the dividends into the holding co, and then distribute it as and when required or reinvest it as suggested. You will only pay tax once, which is when you declare dividends from the holding co and extract some money for yourself.

Maybe the shares will produce a huge amount of dividends one year, but very little the next - without the hold co you could be a super high rate tax payer one year and a basic rate tax payer the next. With the holding co you can smooth out the fluctuations, or continue to accumulate profit in the hold co and withdraw at a later stage in life a small amount annually like a pension.

When I discussed with my accountant he dismissed this practice as a waste of time.

I don't want to criticise him, because he may have been looking at in context with reference to the amounts concerned in your particular situation. But I would be disappointed if he was just generally dismissive of the use of holding companies in all circumstances - it was my accountant that taught me the benefit of them!

 

[Maxwell83]

You could instead choose to take 50k a year out of the only company you have and pay the same rate.

In your example you are adding to complexity and cost for effectively zero benefit.

No, you've totally missed the point.

If I have shares in numerous companies that I do not run as in the OP's case, then I don't control the dividends - they pay the dividends when the company decides and I get taxed on the amounts received in that tax year. How do I avoid getting taxed on £300k of dividends in a single tax year?

The solution is for the holding company to own the shares, and for the dividends to get paid to the holding co., not me. That way I don't have to pay tax on those dividends just yet, but the money is now in my holding co. The holding co doesn't pay tax on dividends received either.

Now, because I own the holding co, I CAN control the dividends that it pays to me. So I can declare £50k of dividends every year for 6 years, instead of receiving £300k of dividends in 1 year. I don't even have to take any of it immediately, I can do it in a few years after I stop earning elsewhere.

The OP asked why do some of his associates have holding companies, and BigDreamer gave a very valid answer - this is one of the reasons that some people have holding companies. You are arguing against it as if its not a real thing that people actually do.

Cost and complexity are sometimes required when large sums are involved and people want to arrange their affairs in a tax efficient manner. If the professional fees are much less than the tax, you pay the professional!

 

[Financial-Modeller]

In addition to the valid reasons already provided, there can be advantages if subsidiaries with different levels of creditworthiness / credit rating require funding, which can be provided by the holding co on terms that suit (the Group / ultimate owner) at that time.

 

[MarkOnline]

In addition to the valid reasons already provided, there can be advantages if subsidiaries with different levels of creditworthiness / credit rating require funding, which can be provided by the holding co on terms that suit (the Group / ultimate owner) at that time.

So hold co can underwrite debt of its subsiduaries, is this underwriting limited. Or does hold co take out the debt then lend to the subsiduary?
Would hold co be limited by its share stake in an SPV for instance or would its obligations change if it were to guarantee SPV debt


This is interesting stuff BTW

 

[Financial-Modeller]

We're going a little beyond the original question, but yes, a Holding Company could act as guarantor for subsidiary debt, or could lend directly to the subsidiary/(ies).

As an illustrative example, an individual owns a Property Company (PropCo), which receives rental income, and pays interest on (a small) mortgage debt secured on the property at a low rate of interest. Surplus net income could be paid out as a dividend or used to reduce debt.

The same individual owns a Property Management Company (ManCo) with poor trading history which has no cash but requires equipment.

Obviously, the owner may use income from the PropCo to inject cash into the ManCo by way of a personal loan (after paying tax on dividends received) or the PropCo could lend money to the ManCo, which might not be tax-efficient for the owner.

Having a Holding Company would introduce further options including using cheap debt in the PropCo to lend to the ManCo via HoldCo on commercial terms that might be below market rate for ManCo and above that for PropCo.

This type of transaction might result in taxable profit being transferred from one company and/or jurisdiction to another within a group.

A HoldCo structure can also open up possibilities to license intellectual property, branding etc across a group, again to best meet the needs of the ultimate beneficial owner(s).

For avoidance of doubt, none of this should be taken as advice. Consult a professional advisor before embarking on anything of this nature.

 

[MarkOnline]

We're going a little beyond the original question, but yes, a Holding Company could act as guarantor for subsidiary debt, or could lend directly to the subsidiary/(ies).

As an illustrative example, an individual owns a Property Company (PropCo), which receives rental income, and pays interest on (a small) mortgage debt secured on the property at a low rate of interest. Surplus net income could be paid out as a dividend or used to reduce debt.

The same individual owns a Property Management Company (ManCo) with poor trading history which has no cash but requires equipment.

Obviously, the owner may use income from the PropCo to inject cash into the ManCo by way of a personal loan (after paying tax on dividends received) or the PropCo could lend money to the ManCo, which might not be tax-efficient for the owner.

Having a Holding Company would introduce further options including using cheap debt in the PropCo to lend to the ManCo via HoldCo on commercial terms that might be below market rate for ManCo and above that for PropCo.

This type of transaction might result in taxable profit being transferred from one company and/or jurisdiction to another within a group.

A HoldCo structure can also open up possibilities to license intellectual property, branding etc across a group, again to best meet the needs of the ultimate beneficial owner(s).

For avoidance of doubt, none of this should be taken as advice. Consult a professional advisor before embarking on anything of this nature.

Thanks, I appreciate it cana be complex but the general gist of what is possible is of great value.

 

[UK Contractor Accountant]

Also might consider grand parents holding some shares in the holding co on trust for minor children.

Can use some of the dividends then to pay annual school fees which will be tax free.