Holding companies – what do they mean?

7 April 2016

Most advisers have had, at some point, a client state that their friends have advised them to place their company (ies) in a group with a holding company.  However, a group structure is not going to suit every business and is often an unnecessary exercise just to give, perhaps, a perception of size.

So is this only for the multi million pound/international businesses? The answer is no. In short, a holding company is essentially a company which owns shares in subsidiary companies.

Why would you have one? There are a number of reasons why you may have a group structure, whether it is for tax purposes, protection of valuable assets or perception.  It is a particularly tricky subject so I have made a small bullet point list below of what I believe the advantages and disadvantages are:

Advantages:

  • Any losses made in the group companies can be offset against each other to minimise the Corporation Tax payable (subject to certain levels of shareholdings).
  • Sales of subsidiary companies could be made tax free under the Substantial Shareholding Exemption. Please note – this exemption is under consultation.
  • The most valuable assets (such as equipment, land or IP) can be ‘ring fenced’. This reduces risk, and is commonly the main reason for a group structure.
  •  If company expansion is foreseeable (especially overseas), the structure allows efficient ownership and control of a large number of different companies, perhaps involved in different industries and registered in different countries.
  • It is far less complicated to dispose of a separate company than a department of a larger business.
  • You can incentivise key employees by putting managers on the board of a subsidiary to give board level experience or granting shares in subsidiary companies without diluting ownership of the main assets.
  • It allows you to seek joint venture partners and equity investors for specific projects and activities without having to offer a stake in the entire business.
  • The existence of a group structure gives reassurance and a perception of a large outfit.

Disadvantages

  • It is more convoluted and many people prefer the simplicity of a single trading company.
  • There is more administration as you need separate accounts, PAYE, VAT (although it is
    possible to group register). This inevitably leads to higher costs!
  • The perception of a large outfit may put off some people and have the opposite effect.

This is a particularly complex area and I could say more on other considerations such as transfer pricing, though I hope that this gives food for thought and maybe put some misconceptions to bed!

If you would like further information on any of the issues addressed in this blog please get in touch with myself or a member of our team.