Protecting business assets and the benefits of holding companies

21st October 2020

Holding companies are not a new concept and have been a useful planning technique that many business owners have used over the years to protect assets such as property, plant and machinery, cash and intellectual property.

This is not a finite list and can be anything deemed valuable to the directors of a business.

What is a holding company?

A ‘holding company’ is a term used for companies that solely exist for the purpose of holding assets. They do not trade, provide any services to third parties or conduct any business operations outside of the corporate group.

Instead, holding companies are used by business owners to own a controlling interest in a trading company (or c

ompanies). Commonly, holding companies also own assets of the trading companies which are then leased back to the trading companies in return for market value rent.

Why are holding companies useful and what are the benefits?

The most common benefit for adapting a holding company structure is to protect the trading assets of a business and also to protect shareholder’s investment in the business.

Trading companies come with general inherent risk that they could be sued for good or services provided, as well as the risk of not being able to pay creditors in the event of a substantial downturn in trading activities. Under either event, if the company does not have enough cash to settle it’s debts, the company could be forced to sell its assets.

Claims can be made by the creditors of a company to appoint a liquidator to liquidate the assets of the company unable to pay its debts, forcing the company to make a ‘fire sale’ of their assets which may not generate the expected level of proceeds if the assets were naturally sold. The proceeds generated would then be used to pay off the creditors of the company with the shareholders only left with ‘what is left in the pot’.

Holding companies are therefore used by business owners to separate key trading assets, or excess cash, from the general risks of a trading company. If this structure is adopted and the trading company is sued, only the assets of the trading company can be liquidated and the assets in the holding company are protected. This could allow the business owners to start afresh or present different opportunities to them, such as leasing the assets to third parties. This can therefore be an extremely valuable tool for protecting a shareholder’s investment.

Whilst protecting assets is a major benefit of a holding company, it is not the only reason. Inserting a holding company can also allow for:

• The tax free sale of a business – it should be noted that under this option, proceeds are paid to the holding company and not the shareholders, therefore, if the shareholders require the cash personally on completion (compared to those who may want to re-invest the proceeds) it may not be more tax efficient. This can be easily avoided with planning, however.
• Generate a natural stream of ring-fenced income – it is likely that any assets transferred to the holding company will still be required within the trading company. The holding company would therefore lease the assets back to the trading company for market value rent
• Separate multiple businesses currently within the same company – companies may have distinct and separate business divisions. Business owners may want to consider separating new ventures, or existing ventures with different levels of risk, into different companies in order to protect the existing business or less riskier businesses.
• Benefit from tax reliefs – there are a number of tax benefits from having companies under one group structure, such as sharing losses between companies, dividends from subsidiary companies and the holding company being exempt from UK Corporation Tax and the tax free transfer of the majority of assets around a group. This can therefore reduce the overall group’s Corporation Tax payable.

It is important to note that, under law, liquidators are able to review any transaction undertaken by the directors / shareholders of a business within 2 years of insolvency. In some cases, this can mean that the transaction is reversed and the assets could be at risk, however, 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 be an issue.

The timing of inserting a holding company and transferring assets to that company is therefore paramount and should be considered whilst the business is performing well.

How are holding companies normally inserted?

Although there are a number of methods to achieve a holding company structure, the most common method is for the shareholders of an existing company to sell their shares to a newly incorporated company in return for newly issued shares in NewCo.

This option is commonly use by business owners as it is cost-effective, does not involve the transfer of operational contracts or employee’s contracts and the least time consuming.  

If I opted for inserting a holding company, what other things do I need to be aware of?

Whilst we do not perceive that there are any substantial drawbacks of a holding company structure, there are a number of areas which business owners should pay direct attention to:

• Having more active companies within a group could mean that companies are bought within the Quarterly Instalment Payment (QIP) regime which alters the time at which Corporation Tax is payable (but does not alter the total amount payable);
• The holding company will need to file statutory accounts and Corporation Tax computations as is required by any limited company;
• Dividends can continue to be paid to shareholders, however, it should be noted that dividends must be paid from the holding company. In practice, this is likely to mean that the trading company should declare a dividend to the holding company (note this is exempt from tax in the holding company) which the holding company can then distributed to the shareholders;

Care should also be given to the various tax implications at each stage of inserting a holding company. Without due care and planning, a liability to Capital Gains Tax, Stamp Duty, Income Tax or even Inheritance Tax (in the event of a shareholder death within 2 years) could arise if the planning is not carefully structured from the outset. Due to this, we would strongly recommend that business owners engage with professional advisors to implement the structure.

Summary

Holding companies are an extremely useful tool and should not be overlooked by business owners. Creating a successful trading business is an extremely difficult task and so protecting what assets a business has already generated should be something strongly considered by business owners.

If you would like any further information, or would like to discuss whether a holding company could be achievable for you, please contact Connor Smith at Shorts on either connor.smith@shorts.uk.com or on 07522 240 020.

You’re invited to a free webinar hosted by Shorts and Sheffield Chamber

Shorts and the chamber have arranged a free online webinar on 19^th November 9am to look at holding company structures in finer detail. If you would like to register your interest, please join here.