Group structures and the insertion of holding companies (‘HoldCo’s’) have been widely used. This allow businesses to protect assets and may provide a better structure to plan for the future. There are many benefits of such an arrangement which are discussed in this article.
A holding company is a separate company, also known as a HoldCo/TopCo or ParentCo. It is formed to hold a controlling interest in a subsidiary company or companies. It is created through a ‘share for share’ exchange which avoids a chargeable disposal for CGT purposes on the existing shares by the shareholders.
A “share for share exchange” is where existing shareholders exchange their shareholdings in the current trading company for an issue of shares in the new holding company. This essentially inserts a holding company between the current shareholders and the subsidiary company.
A group structure allows for better asset management and better distribution of assets. Key assets such as property, cash, or trademarks can be transferred into HoldCo, usually to protect them from creditors in the trading company. The idea is that the rights and ownership of assets sit in the non-trading HoldCo.
With multiple subsidiary structures, different corporate entities could hold separate key assets and thereby provide additional risk management benefits should any one of the other group companies be subject to legal proceedings.
The holding company is not responsible for any losses, debts, or legal failings of any of its subsidiary companies.
The structure may also help with applications for loans and borrowings as different lenders can be approached for each corporate entity.
Group structuring ensures business continuation, even if the trading subsidiary should fail as key assets are still retained.
The shareholders may wish to retain the investments and other assets and only sell, say, the trading part of the business. Buyers may want to only acquire the trade so separating the trading activity from investment assets prior to sale can be a useful strategy from both a commercial, and tax efficiency point of view.
Provided that the conditions are met, the whole gain on the disposal of shares of a subsidiary company will be exempt – this is known as the Substantial Shareholding Exemption (‘SSE’).
This is advantageous if the HoldCo/group wants to reinvest the proceeds but can be disadvantageous if the shareholders want to extract the funds in a personal capacity. Consideration will need to be given to the subsequent extraction of the proceeds.
Any dividends paid by subsidiary companies to holding companies are exempt from Corporation Tax. The ultimate shareholder(s) can extract the dividend from HoldCo rather than extracting it from perhaps multiple different trading companies and so simplify profit extraction and tax planning.
Group relief is available where the beneficial interest in property is transferred from one corporate entity to another and those entities are associated at the time the instrument is executed. Association is through one entity being the parent of the other, or both having a common parent.
The parent-subsidiary relationship is defined as beneficial ownership of at least 75% of the ordinary share capital and beneficial entitlement to at least 75% of profits and assets available for distribution to equity holders and may be direct or indirect through other companies.
SDLT group relief is also available, so no SDLT is payable on inter-group transfers.
If conditions are met, there are options to offset trading and other losses between the companies. This will allow for tax relief to be obtained in a profit-making company should a loss be made in another.
Where property is transferred within a group and benefits from CGT and SDLT group relief, the reliefs can be clawed back if a subsidiary leaves the group whilst still holding the property. The clawback operates if the subsidiary leaves the group within six years for CGT or three years for SDLT.
It is important to make an informed decision as some potential drawbacks from inserting a HoldCo above your trading/investment company/companies are:
In appropriate circumstances creating a group structure can have several advantages, but the possible drawbacks also need to be considered.
Note Liquidators can review any transaction undertaken by the directors/shareholders of a business within 2 years of insolvency. In some peculiar cases, this can mean that the transaction is overturned and the assets could be at risk. Providing that the company was balance sheet solvent, cash flow solvent, and the transaction did not result in the company becoming insolvent, this should not pose an issue.
The timing of inserting a holding company and transferring assets to that company is therefore vital and should be considered whilst the business is performing well.
If you are considering implementing a group structure reputable Tax Advisor then ETC Tax has the right people. We can obtain clearance on the transaction from HMRC and assist in providing the business with a valuation, if required.
It is important to seek advice before restructuring as the availability of other tax reliefs. This includes Business Asset Disposal Relief (‘BADR’) and Business Property Relief (‘BPR’) should be considered.
Don’t hesitate to get in touch with any group structuring queries you may have.
