There are various reasons why the owners of a limited company (or a series of limited companies) may form a group of companies by introducing a “holding company”.
One of the main motivations is risk management; group structures can be used to ring-fence specific assets. Profits generated by the trading subsidiary can be paid up to the holding company as dividends, normally tax-free; if the trading company subsequently experiences problems, cash (and other assets) held by the holding company will generally be protected from creditors, provided the holding company has not provided guarantees or other security in respect of the trading company’s debts. It is therefore common in small groups of companies to place assets such as intellectual property and business premises into the holding company to manage risk and promote continuity.
In another (very different) scenario, a benefit may arise if a holding company sells its shares in a subsidiary trading company at a gain. The “substantial shareholding exemption” exempts qualifying gains realised by companies from corporation tax; contrast that with the position of individuals, who would normally be chargeable to capital gains tax on the sale of shares at a gain. If the business owners wish to reinvest the profits from the sale of a trading company into new business ventures (rather than taking the proceeds for personal purposes), then introducing a holding company at least a year prior to the sale can sometimes achieve significant tax savings.
In cases where an individual (or individuals) own more than one trading company, creating a group using a holding company may provide opportunities to better manage the overall tax exposure associated with the different businesses. For example, trading losses arising within one company can be offset against the profits of another company where both are members of a qualifying group. Chargeable assets can be transferred between companies within a qualifying capital gains group with no chargeable gain (or allowable loss) arising; chargeable gains and allowable losses arising in different companies can be combined in a single group company in order to reduce the overall tax bill.
Normally a holding company can be inserted between the business owner(s) and their existing company (or companies) and the shares restructured with no adverse capital gains tax or stamp duty consequences, using “share for share” arrangements. In its most basic form, the owners of the trading company (or companies) sell their shares to the holding company, in exchange for new shares in the holding company. If the qualifying conditions are met then for capital gains tax purposes the owners are not treated as having sold their shares in the trading company.
For further details or to discuss your specific circumstances or requirements, contact Ivan.
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