Holding company structures

Nov 9, 2021 | Tax Tuesday, Taxation

In recent Tax Tuesday pieces, we have looked at tax efficient ways to incentivise the workforce, given the importance of a motivated workforce to the success of a business.

Another key consideration for success is to ensure a business adopts the most appropriate trading structure and this week we look at use of holding companies.

We covered some detail on use of holding companies in a previous Tax Tuesday piece back in February this year (Have you considered adding a Holding Company to your Operating Company?) and here we recap and also expand on the potential uses that can be made of this versatile structure.

Where a business trades as a single standalone limited company, thought might be given to whether it makes commercial sense to put a holding company above the trading company.

In appropriate circumstances, this can be done at low or in many cases no tax cost.

As mentioned previously, the current shareholders ‘sell’ their shares to a newly incorporated company. The ‘consideration’ provided by the new company is shares issued in itself.

So in effect, the shareholders still have exactly the same ownership rights which are now through shares in the new holding company, with the trading company becoming a 100% subsidiary of the new company.

Circumstances where this could be favourable are as follows:

  1. If a company has accumulated cash above its normal working capital requirements or has a valuable asset such as a trading premises, then it may be commercially prudent to look to separate these assets from day-to-day trading risk.
  2. By putting a holding company above the existing trading company, it is possible to transfer the excess cash/property out of the trading entity into the holding company and so afford them an element of protection. Such assets would remain available for use by the trade as required.
  3. If the owners are looking to sell the business, then by removing excess assets from the trading entity, this can make the acquisition more affordable and thereby increase the pool of potential purchasers.
  4. With a holding company and a subsidiary, there would be two boards of directors. Key employees could sit on the subordinate board of directors but not the board of the holding company. The owners can therefore maintain overall control of the business and its assets whilst giving key senior employees an element of status as directors in the subsidiary.
  5. If the owners are looking to acquire other businesses, then setting up a holding company creates a ready-made structure for the tax efficient acquisition of further trading companies. Such a structure is also very tax efficient if the decision was ever made to sell an individual trading subsidiary.
  6. Introducing a holding company can be used as a means to buy out a retiring shareholder in circumstances where other methods, such as ‘own share purchases’ may not be appropriate. All shareholders would sell their shares to the holding company; the retiring shareholder would take cash/debt and the continuing shareholders would take shares in the new holding company.  This enables the sale to be financed by profits from the business going forward as they arise.

For further information on holding companies and other business structure matters, please contact your usual relationship principal or email tax@haroldsharp.co.uk.

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