Holding Company Structure – Benefits and Drawbacks

Despite having fully exited the European Union, the United Kingdom remains an appealing location to establish an international holding company because it not only has a relatively stable legal, political, and economic system, but it also has an attractive tax regime in its own right and a large network of tax treaties with the rest of the world.

Some businesses decide to form a group structure with a "holding company" to reduce risk and maximise tax efficiency. In this blog, we will let you know what exactly is a holding company, what are its benefits and drawbacks?

What is a Holding Company?

Holding company meaning varies as per the context it is being used in. However, as per the Companies Act, a company is a holding company, if:

• It holds the majority of the voting rights in its subsidiary company; or
• It is a member of its subsidiary company and holds the right to appoint or remove a majority of its board of directors.

In simpler words, a holding company does not produce any goods or services by itself; instead, its main purpose is to own shares of other companies to form a corporate group. The real purpose of its existence is, therefore, to control another company.

Apart from this, it can also own properties such as real estate, patents, trademarks, stocks, and other assets, ring-fenced from the trading business. By owning assets, holding companies allow individuals to protect their personal assets and thus free them from the liability of debts, potential lawsuits, and any other possible risks.

A perfect example of a holding company is Berkshire Hathaway. Its major holdings include Berkshire Hathaway Energy, Business Wire, Dairy Queen, Clayton Homes, Duracell, GEICO, Fruit of the Loom, RC Wiley Home Furnishings, Marmon Group etc. Apart from the above mentioned major holdings, Berkshire Hathaway also has minor holdings in companies such as Delta Airlines, Kinder Morgan, Apple, American Express, IBM, Goldman Sachs, The Coca-Cola Company etc.

You can also read our blog on benefits of forming companies in a group structure

Advantages and Disadvantages of Holding Company

Advantages of a Holding Company

Setting up a holding company has its own advantages, such as:

Minimise the risk

A single company having multiple businesses has all its assets and business exposed if there are any issues in any part of the business. The holding company structure allows better asset management, better distribution of assets and efficient sale of the asset. It also helps with loans, borrowings and business growth. It also helps with loans and borrowings. The idea is the main ownership of assets and rights sits in the non-trading company.

For example, if one of the subsidiary companies goes bankrupt, the creditors can receive their due remuneration only from that subsidiary company and not from its holding company. Thus to save itself from the major risks, a multinational company should structure itself in a way that its one subsidiary owns its brand name and trademarks, another subsidiary own its real estate. Another one owns its equipment, and so on, which means in case one of the subsidiaries goes bankrupt for whatever reason, the business keeps ongoing. Also, this structure limits tax liability.

Group Relief

Provided the structure satisfies strict conditions for Group Loss relief and/ or Capital Gains Group, you have an option to set off losses between companies in groups. Losses made by a company in a group can be transferred to another company in a 75% Group. You can transfer current year trading losses, non-trading deficits, excess UK property income, excess management expenses and excess qualifying donations. If the group satisfies Capital Gains Group conditions, you can also transfer Capital Gains or Capital Losses between Group companies.

Substantial Shareholding Exemption (SSE)

If the shares of the subsidiary companies are sold, the whole gain on disposal of shares will be exempt from Corporation tax, provided conditions for SSE are satisfied.

Loan Management

There is no dependency on a single mortgage or loan provider. For each company, you can approach a different commercial loan provider to avoid the problem of the first charge and second charge. The loan between connected companies, companies in the group does not raise any tax charge. Though the amortization of the loan is not allowable, there is a relief for interest on payment. So, there is unrestricted use of reserves of one company for any other company in the group with the added advantage to charge market interest rate.

Tax planning

The holding company can be setup in another country with a relatively lower corporate tax rate than the UK.

Succession Planning

One of the main advantages of setting up a holding company is that it ensures the business continuation, even if it comes at the loss of its key people.

Dividend Management

The dividend paid by subsidiary companies to holding company is exempt from Corporation Tax. The ultimate shareholder can then extract the dividend when feasible. This will ensure more control and facilitate centralised income; rather than extracting dividends through different companies for a shareholder with many business interests.

Drawbacks of a Holding company

However, like every other thing, a holding company also has its drawbacks, such as:

Complex administration

It isn’t easy to handle the administration of your subsidiary companies. Each subsidiary must record their sales and costs in separate books unless it would become complex to manage the books of accounts.

Management challenges

Holding companies typically prefer to influence the operating companies policies and management decisions. If the operating company does not agree with the parent companys decision, this frequently leads to a management conflict.

Cost

The cost for using such a structure is a bit steep but tax-efficient in the long run.

Despite the disadvantages, holding companies provide protection and are tax-efficient in the long run.

If you would like to restructure your business or need advice on setting up a Holding company structure, kindly call us on 03330886686, or you can e-mail us at info@dnsaccountants.co.uk

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.