A holding company, at its core, exists to own shares in other companies rather than engage in the direct trade of goods or services. Think of it as an umbrella organisation that oversees multiple subsidiaries, keeping them legally distinct while maintaining control. And while this setup is often associated with large corporations, small and medium-sized businesses can also reap substantial advantages.
To get more information about umbrella companies, read here.
In this guide, we’ll explore everything you need to know about holding companies—from understanding their structure to assessing whether this approach is right for your business.
What Is a Holding Company?
A holding company is a type of limited company that primarily owns assets and shares in other businesses, known as subsidiaries.
Instead of producing goods or offering services itself, its main role is to oversee investments and maintain controlling interests in these companies.
According to the Companies Act 2006, a company becomes a holding (or "parent") company when it:
- Possesses over 50% of the voting rights in another company.
- Holds the authority to appoint or dismiss the majority of the subsidiary's board of directors.
- Exercises control over a majority of voting rights through agreements with other shareholders.
The companies it controls are called subsidiaries, and this relationship creates what's known as a parent-subsidiary structure.
Understanding Holding Company Structure
The relationship between a holding company and its subsidiaries is founded on a straightforward principle: ownership establishes control. Here’s how it functions:
The Parent Company (Holding Company)
- Owns the majority shareholding (typically 51% or more) in subsidiary companies
- Makes strategic decisions affecting the group
- Receives dividends from profitable subsidiaries
- Can transfer assets between companies within the group
The Subsidiaries
- Function as independent legal entities
- Carry out core business operations, such as trading, manufacturing, or providing services
- Report to the holding company via designated directors
- Manage their own bank accounts and maintain separate financial records
This structure enables business owners to separate various aspects of their operations while retaining full oversight and control through the holding company.
Holding Company Tax Benefits
Businesses often create holding companies primarily to leverage various tax advantages:
Substantial Shareholding Exemption
A holding company can sell shares in a subsidiary without incurring capital gains tax, provided it owns at least 10% of the subsidiary's ordinary shares for a continuous 12-month period within the six years before the disposal. This tax exemption applies when both companies operate as active trading businesses.
If you want to learn more about the ever-so-slightly confusing Capital Gains Tax, we have plenty of resources available for beginners.
Dividend Tax Relief
Dividends received by the holding company from UK subsidiaries are generally exempt from corporation tax, avoiding double taxation on the same profits.
If you are struggling to figure out your dividend tax relief, use our calculator here to immediately find out with 100% accuracy.
Group Relief
Losses incurred by one subsidiary can be used to offset profits generated by another within the same group, effectively lowering the overall tax burden.
For corporate losses, our beginners' guide is perfect for you.
Asset Transfers
Assets can frequently be transferred between companies within the same group without incurring immediate tax liabilities. This offers valuable flexibility when it comes to restructuring operations.
Disadvantages of a Holding Company
While holding companies offer many advantages, they may not be the right fit for every business. Here are some potential drawbacks to consider:
Increased Complexity
Managing multiple companies comes with several challenges, including:
- Increased filing requirements with Companies House
- Separate accounting and bookkeeping for each business
- More complex tax returns and compliance obligations
- Higher administrative expenses
Limited Liability Exceptions
Subsidiaries are typically shielded from the debts of other entities within the same group. However, in certain circumstances, courts may "pierce the corporate veil" and hold the parent company accountable. This can occur if:
- The parent company exerts excessive control over the subsidiary's daily operations.
- There is evidence of fraud or misconduct.
- The corporate structure is deemed artificial or designed solely for tax evasion.
Banking Challenges
Many banks, particularly newer challenger banks, can be hesitant to offer accounts for holding companies. In such cases, it may be necessary to turn to established high-street banks and provide a clear explanation of your business structure.
Examples of Holding Companies
Exploring how established businesses utilize holding company structures provides valuable insight into their practical benefits and real-world applications.
Alphabet Inc.
Alphabet, the parent company of Google, was established in 2015 to distinguish Google's core search and advertising operations from its more experimental initiatives. This organizational structure offers several advantages:
- Enables Google to concentrate on its highly profitable core business
- Allows other subsidiaries to explore innovative, high-risk, high-reward projects
- Provides investors with more transparent financial reporting
- Safeguards valuable assets from potential financial risks
Berkshire Hathaway
Warren Buffett's investment firm oversees a diverse portfolio of subsidiaries spanning various industries, including insurance (GEICO) and retail (See's Candies). This strategic structure offers several key advantages:
- Diversification across a wide range of sectors
- Streamlined and effective capital allocation across businesses
- Tax-efficient fund management within the organization
UK SME Example
A property developer might create a strategic business structure by establishing:
- A holding company to safeguard valuable assets such as land and equipment
- A subsidiary dedicated to residential developments
- Another subsidiary focused on commercial projects
- A separate entity for property management services
This approach not only protects critical assets in case a development faces challenges but also ensures efficient management across different business areas.
How to Set Up a Holding Company
How to Set Up a Holding Company: A Simple Step-by-Step Guide
- Choose a Name: Pick a unique name, check availability, and include "Holdings" if desired. As easy as it sounds, picking a company name is a whole new challenge, read here to make it easier for yourself.
- Prepare Information: Gather details like address, directors, shareholders, share capital, SIC codes (e.g., 82990), and PSC info. Under the new regulations introduced by Companies House earlier this year you need to go through an identity verification process if you are a PSC or a director, check here to find out what you need.
- File Documents: Submit Memorandum, Articles of Association, and Form IN01 to Companies House.
- Get Incorporated: Receive your Certificate of Incorporation, share certificates, and other necessary documents within 24 hours (for online applications).
- Set Up Infrastructure: Open a business bank account, register for Corporation Tax, set up accounting, and consider VAT registration.
- Acquire Subsidiaries: Transfer shares of existing companies or create new subsidiaries owned by the holding company.
Simplify growth with a holding company today!!
Is a Holding Company Right for You?
You might want to consider setting up a holding company if you:
Have Multiple Business Interests
- Manage multiple companies or plan to expand through acquisitions
- Operate across diverse industries or regions
- Aim to isolate high-risk ventures from more stable operations
Seek Tax Efficiency
- Maximise profits eligible for group relief
- Strategically plan future business disposals
- Streamline and optimise dividend distribution across your group
Need Asset Protection
- Hold valuable assets such as property, equipment, or intellectual property
- Operate in industries prone to higher liability risks
- Seek to safeguard one business from the potential challenges of another
Plan for Growth
- Plan to grow through strategic acquisitions
- Require flexibility to streamline and restructure operations
- Aim to attract investors while retaining control
A holding company might not be the right choice if you:
- Operate a single, simple business
- Prefer to avoid added administrative complexity
- Have limited resources to cover extra compliance expenses
- Don’t need the unique advantages this structure offers
Making Your Decision
Setting up a holding company can offer benefits like tax efficiency, asset protection, and business growth, but it requires careful planning. Consult professionals such as an accountant, solicitor, and tax adviser to ensure compliance and make informed decisions. With the right guidance, a holding company could help optimise operations and support sustainable growth.
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