Unlock the Business Advantages of Holding Companies: A Complete Guide for Small Business Owners

As a small business owner, managing your assets and growth can become complex, especially as you expand your operations and your company structure becomes more complicated. One strategic move that can help streamline your business structure is setting up a holding company that can act as the parent company to the various subsidiaries in your group structure.

In this article, we’ll explore

1. The advantages of holding companies
2. How a holiding company fits into your group structure,
3. How to set one up to maximise your tax benefits and protect assets.

Whether you’re new to the concept or exploring options for tax planning, this guide will cover everything you need to know.

What is a holding company? And why do you need one?

Let’s start by defining exactly what we mean by a ‘holding company’.

A holding company is a parent entity that owns and controls all the subsidiary companies in your group structure, but without getting involved in their day-to-day operations. Its primary purpose is to manage assets like your shares, intellectual property or real estate.

What’s the advantage of this? In short, holding companies allow you to improve your risk management and centralise control over your operations, while offering significant tax-planning opportunities.

What are the main types of holding company?

Before we go any further, it’s worth getting an idea of the different types of holding companies that exist, what they’re used for and where they may offer value for your risk management, company governance and tax planning.

There are several types of holding companies to consider:

1. Pure holding company: a pure holding company exists solely to own shares in the subsidiaries (smaller company entities) in your group structure. It does not engage in other business activities.
2. Mixed holding company: in addition to owning shares, a mixed holding company also participates in operational management, allowing greater control over the day-to-day running of the business.
3. Intermediate holding company: an intermediate holding company functions as a subsidiary within a larger corporate group, being both owned by a parent company and holding ownership in other entities.

What makes an entity a ‘subsidiary’ to a holding company?

Holding companies exist to help you manage the relationships and corporate interactions between the different entities in your group. The holding company will generally act as the parent company, with one or more subsidiaries beneath that parent in your organisational structure.

So, what makes an entity a subsidiary?

The Companies Act 2006 outlines four key ways that an entity can act as a subsidiary to a holding company. A company is a ‘subsidiary’ of another company, its ‘holding company’, if that other company:

1. Holds a majority of the voting rights in it, or
2. Is a member of it and has the right to appoint or remove a majority of its board of directors, or
3. Is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it,
4. Or if it is a subsidiary of a company that is itself a subsidiary of that other company.

The key advantages of a holding company

So, we know what a holding company is, and how it acts to control the subsidiaries in your group. But is it a good idea to create a holding company? And how will making use of a holding company add tangible value for you as the owners and directors of a small business?

In a nutshell, there are four main business areas where limited companies can achieve some fundamental advantages by setting up a UK holding company to act as a parent company in your corporate structure.

The four main areas where you’ll add value are:

1. Risk management
2. Less liability
3. Tax benefits
4. Centralised management

Let’s dive into those four business advantages in more detail

1. Risk management

One of your key responsibilities as a company director is managing and minimising the risk to your business. Having a holding company structure for the business is significant boost to this risk management.

For example:

• Separating assets: a holding company isolates your personal assets from your business liabilities, significantly reducing risk as a result.
• Tax benefits: the efficient structures of a holding company setup lead to major tax advantages around corporation tax and capital gains tax.
• Succession planning: having that holding company in place ensures a smooth transfer of ownership and control when selling up or exiting.
• Protecting against legal claims: the holding company shields your personal assets from lawsuits that may be raised against the business.
• Facilitating international expansion: a group structure allows you to simplifying your operations and tax compliance in multiple jurisdictions.

2. Less liability

Incorporating the business as a limited company goes some way to reducing your personal liability as the owner. But using a holding company can help to improve that limited liability further, giving you increased peace of mind.

For example:

• Protection of your assets: your personal assets and business liabilities are kept separate, protecting them from creditors and lawsuits.
• Limiting personal exposure: the holding company acts as a shield between you, the business owner, and any potential liabilities.
• Facilitating succession planning: Allowing for a smoother transfer of ownership and control without exposing personal assets.

3. Tax Benefits

Holding companies in the UK enjoy several tax advantages, allowing you to reduce your tax spend and invest these funds back into the business.

For example:

• Structuring dividends: dividends received from subsidiaries are usually exempt from corporation tax, allowing you to optimise yourdividend payments to minimise the personal tax burden.
• Claiming capital allowances: A holding company delivers tax relief on your capital expenditures. You can also move assets between the companies in your group, tax-free
• Efficient tax planning: you can leverage group relief and other tax-saving strategies to cut your tax spend. 
• Offsetting certain losses: when your company has ‘qualifying group relationship with another company’, you have the option to offset certain losses, including trading loses against the profits made by other entities in your group structure. , while dividends received from subsidiaries are usually exempt from corporation tax.
• Substantial Shareholding Exemption (SSE): SSE provides UK companies with relief from corporation tax on gains from selling shares in a trading company, as long as certain conditions are satisfied – hold at least 10% of the shares for 12 months in the last six years, and the gains could be 100% tax free for the holding company. If a loss results from the sale, it cannot reduce taxable profits.

Tax is a complex subject and you’ll want to get professional tax advice.

4. Centralised Management

By consolidating your subsidiaries under a holding company, you go a long way towards simplifying your decision-making and control over the business.

For example:

• Overseeing subsidiaries: with a group of companies under a holding company you can manage multiple businesses under a single umbrella.
• Streamlining operations: having a parent company helps to centralise all your decision-making and allocation of funds and resources.
• Improving financial control: establishing a holding company provides an opportunity to consolidate your financial information and reporting, making it easier to keep track of cash flow, revenue and profits. 
• Facilitating strategic planning: one of the main benefits is the ability to align the groups core goals and strategies across different and diverse business units and operations.
• Enhanced tax compliance – a greater awareness of your group-wide finances is a boost to your tax compliance, allowing you to apply uniform compliance processes and benefit from any tax incentives and write-offs that may be available.

How does a holding company generate income?

Holding companies primarily generate income through:

• Dividends from subsidiaries
• Interest on loans provided to subsidiaries
• Leasing assets (such as equipment or property) to subsidiaries These passive income streams allow holding companies to remain financially robust without directly engaging in operational tasks.

Parent company vs. holding company

Understanding the key differences

A parent company and a holding company may both own subsidiaries, but they have distinct roles in business operations.

A holding company primarily exists to own and manage its investments in subsidiaries, without engaging in day-to-day business activities. This structure helps isolate risks across its subsidiaries, ensuring that liabilities from one entity don’t affect the entire group. The holding company itself does not produce goods or services – its focus is on maintaining investments.

On the other hand, a parent company manages its own business operations alongside its subsidiaries. For instance, a parent company may manufacture and sell its own products while owning subsidiary companies in related or unrelated industries. This allows for more direct operational control while still benefiting from the diversification offered by subsidiary ownership.

Your quick guide to setting up a holding company

It’s far simpler to set up a holding company structure at point you found your new business. Rearranging the legal structure of the business at a later stage is possible, but becomes a more complicated process. Shares will need to be exchanged and the transaction may need to be verified by HM Revenue & Customs (HMRC) to ensure it’s seen as a reorganisation for cash purposes. 

1. Outline the objectives of the holding company

Start off by defining why you’re creating the holding company and what the objectives are; for example for business expansion, risk management purposes, tax planning or protection off your personal assets.

2. Register the name of the holding company

In the UK, it’s mandatory to register the new company name of your holding company with Companies House. The term ‘holding’ may appear in your company but is not required. The name must, however, be unique and in keeping with the company’s core mission and goals.

3. Appoint shareholders and directors for the new company

A board of directors is required who will be responsible for decision-making across the parent company and the subsidiaries. It’s important to choose suitable candidates as directors and to meet all compliance checks when selecting who will run the group and the wider business.

4. Add your subsidiaries to the group structure

You’ll add your subsidiary entities to your holding company structure in two key ways. You’ll either 1) acquire the subsidiary or 2) set up a brand new entity as a new subsidiary. Each subsidiary will need to operate as a unique and separate entity, so you can manage risk and liability effectively. 

5. Comply with all legal compliance requirements

It’s important that your holding company and group structure fully complies with all UK legal regulations. Part of the directors’ duties will be to ensure that you comply with the rules re filing of annual accounts, updates to Companies House and meeting your corporation tax obligations. 

The main tax implications of using a holding company

When you start a holding company, one of your main goals is likely to be an improvement to your tax planning and access to better tax incentives. 

Let’s look at two of the most significant tax advantages.

Corporation Tax

For a business, there’s no distinction between income profits and capital profits. As a holding company, you are subject to corporation tax, but it’s possible to defer or minimise the company’s tax liabilities through use  of strategic planning. For instance, dividends received from subsidiaries are generally exempt from corporation tax.

VAT Exemptions

Your holding company may be exempt from VAT for specific activities, such as acquiring shares or receiving dividends. This reduces your tax liaibilties and gives a boost to the financial efficiency of your business structure.

Disadvantages of holding companies

While there are significant advantages of having a parent company in place, holding companies do also come with some challenges:

• Complexity: Managing multiple subsidiaries requires meticulous bookkeeping and separate financial records for each entity.
• Transparency: Complex structures can make it difficult for investors and creditors to assess the financial health of the company.
• Increased Risk: Holding companies are exposed to the risks of their subsidiaries, meaning poor performance in one company can affect the entire group. One badly performing subsidiary could potentially drag down the performance of the entire group.

FAQs on Holding Companies

1. What are the main advantages of a holding company?

The primary benefits include improved risk protection, less liability as a director, greater tax efficiency, and a centralised approach to the management of the whole business. Holding companies also enable strategic acquisitions and business expansion.

2. Can a holding company be set up by a small business?

Yes, even small businesses can set up a holding company, especially if they plan to diversify their operations or protect valuable assets.

3. How does a holding company reduce tax liabilities?

Holding companies can reduce your tax liabilities through tax exemptions on dividends and capital gains, as well as making use of VAT exemptions.

4. Do holding companies pay tax on dividends?

In the UK, dividends received by a holding company from its subsidiaries are typically exempt from corporation tax, provided certain conditions are met.

A helping hand with your financial strategy

Setting up a holding company is a strategic move that helps your small business protect its assets, reduce risk, streamline management and optimise the tax planning for your group – all through a centralised group structure. 

By understanding the structure and benefits of holding companies, you can make informed decisions that will help your business thrive. 

At FD Works, we specialise in helping small business owners navigate complex financial structures, making sure you comply with the rules, make use of the best tax incentives and maximise your business potential.

Get in touch to talk about your plans for a group structure, business-wide financial strategy and the core benefits of using a holding company.

Contact us for a chat