Holding Company, Why You Should Set One Up and What Are the Advantage and Disadvantages of Having This Business Structure?
What is a Holding Group in the UK?
A holding group (or holding company structure) in the UK consists of a parent company (the holding company) that owns and controls subsidiary companies. The holding company does not necessarily trade itself but holds shares in its subsidiaries, which carry out business activities.
Advantages of a Holding Company Structure
The holding company can own valuable assets (e.g., property, intellectual property, cash reserves) separate from trading companies.
If a subsidiary fails, creditors typically cannot access the holding company’s assets.
Dividend Exemption: Dividends from subsidiaries to the holding company are often tax-free under the Substantial Shareholding Exemption (SSE). Dividends are paid to the holding company free of tax, and then the shareholders of the holding company will pay tax on the money when taken out to personal dividends.
Group Relief: Losses in one subsidiary may be offset against profits in another, reducing corporation tax liability.
By separating different business activities into subsidiaries, financial and legal risks can be ring-fenced.
The group can buy and sell subsidiaries without affecting the entire business structure.
Buyers may prefer to acquire a standalone subsidiary rather than dealing with a complex trading company.
The holding company can act as a vehicle for family wealth, investment, or inheritance tax planning. By separating different business activities into subsidiaries, financial and legal risks can be ring-fenced.
New investors can invest in specific subsidiaries rather than the whole business.
Disadvantages of a Holding Company Structure
More companies = more accounts, tax returns, and compliance obligations.
Additional payroll, bookkeeping, and legal costs.
More difficult to oversee multiple companies compared to a single trading entity.
Potential for inter-company loan and transfer pricing tax issues.
Small Business Rate Relief and VAT thresholds could be lost if turnover or property ownership is split across multiple companies.
HMRC may challenge structures deemed to be set up purely for tax avoidance.
Process of Setting Up a Holding Company Structure in the UK
- Incorporate the Holding Company
Register a new limited company with Companies House (often as a non-trading entity).
Standard incorporation steps apply: name selection, director appointments, share structure, etc.
- Structure the Subsidiaries
The holding company acquires or establishes one or more trading subsidiaries.
Share transfer agreements may be required if the holding company is taking control of an existing business.
- Implement Group Accounting & Tax Planning
Ensure proper inter-company accounting, transfer pricing compliance, and tax structuring.
VAT registration may be needed for the group (potential VAT group registration).
- Legal Agreements & Asset Transfers
Draft and execute shareholder agreements, inter-company service agreements, and intellectual property assignments (if applicable).
- HMRC Notifications
Inform HMRC of the new structure, particularly if making use of group relief or VAT grouping.