The tax advantages of holding shares in a holding company

March 1, 2018|In KRW Tax Tips|By Keith Witchell

There are many reasons to consider holding the shares in your trading company through a separate holding company, the main one being to safeguard retained profits.

We often recommend setting up a holding company to successful owner managed business owners, with the owners to then transfer their shares in the trading company to the new holding company, in return for owning shares in the holding company. Such transfers can usually be executed without triggering any Capital Gains Tax or stamp duty, through use of share for share exchange exemptions.

After these steps have been taken a simple group is formed, with a holding company at the top which owns the shares in the trading company or companies. Dividends can pass from the trading company or companies to the holding company tax-free, which then allows surplus retained profits to be moved up into the holding company, where they are ring-fenced from the trading company, so that if anything adverse happens to the trading company these funds are safeguarded. The owners then take their dividends from the holding company.

There are many other reasons why holding companies can be advantageous, but one potential benefit relates to the tax on a future sale of the trading company. As set out in this month’s Tax News article, the Substantial Shareholding Exemption (SSE) means that where a company owns more than 10% of the shares in another company, and sells those shares, there is no tax to pay on any gains arising.

In many cases the sale of your trading company might be linked to retirement, and you may want to access the proceeds from the sale of the trading company personally. In this case, while the sale of the trading company’s shares by your holding company will be tax exempt thanks to the SSE, you would then need to liquidate the holding company to access the funds as capital, upon which Entrepreneurs Relief could be claimed, so that you only pay 10% tax.

In such cases, you have gained nothing by holding the shares via a holding company, as if you still owned the shares in the trading company personally, you should have qualified for Entrepreneurs Relief when you sold them, with a 10% tax rate applying. In fact, you would be slightly worse off, due to the costs of liquidating the holding company to access the funds as capital (rather than dividends).

But, what if you want to invest the proceeds from the sale of the trading company in another trading venture? In this case holding your shares via a holding company provides a useful advantage as it will be possible to reinvest the proceeds into a new venture without incurring any tax on the sale.

Similarly, you may wish to invest the proceeds into a buy-to-let portfolio. Due to changes to income tax for individuals owning property, it is often better to hold properties in a company, so with the holding company structure you could do this without first incurring 10% tax, as you would have if you had owned the shares in the trading company personally.

Key Facts

  • Holding your trading company shares in a holding company allows profits to be safeguarded
  • Tax advantages can also apply by using the substantial shareholding exemption (SSE)
  • No tax should be due on the sale of the trading company, thanks to the SSE
  • This is beneficial where proceeds will be invested in another venture or property portfolio

For further advice on this matter, please contact me.

Keith Witchell