In the UK, there are many different corporate structures, some of which exist to fulfil particular purposes. One such example is a holding company, a unique type of business that doesn’t engage in day-to-day activities but instead owns controlling shares in subsidiary companies. 

In this guide, we’ll explore what a holding company is, the benefits of having one, and what you may need to know if you’re working with one as a Sole Trader or Limited company.

What is a holding company in the UK?

Definition and legal structure

A holding company, sometimes known as a parent company, is a private limited company (or can be public)  that owns and manages the assets of another company, known as a subsidiary. These assets can be shares, physical property and intellectual property. 

A wholly owned subsidiary means the holding company owns 100% of the shares, not just more than 50%. More than 50% is simply a subsidiary with a controlling interest.

{{tax-guide}}

What is the relationship between a holding company and subsidiary?

The relationship between a holding company and a subsidiary is defined within section 1159 of the Companies Act 2006. A holding company is considered to be the ‘parent’ when: 

• The holding company owns over 50% of the voting rights in the subsidiary
• It is a member of the subsidiary and can appoint or remove a majority of its directors
• It is a member of the subsidiary and has agreements in place with other shareholders that effectively give it majority voting rights in the subsidiary

Differences from other companies

Legally, a holding company is usually structured as a private limited company and must be registered with Companies House in the same way. However, unlike a normal limited business, they do not engage in any trading. Instead, it makes money from the dividends generated by the shares in its subsidiaries. 

Benefits of setting up a holding company in the UK

Holding companies are often viewed as something reserved for large corporations – but this isn’t always the case. In some cases, SME businesses can benefit from splitting into a group of subsidiaries owned by a holding company. Here are the main benefits to help you make a decision: 

• Risk management: having a holding company is a great way to manage risk. Not only is the holding company protected from liability for a subsidiary’s losses, debts and legal failings, but you can also actively manage risk by assigning certain activities to specific subsidiaries and ‘siloing’ them. This requires active management and ongoing supervision but is one of the most compelling reasons that some of Britain’s largest organisations use holding companies. 
• Asset protection: if a business owns assets, they can use a holding company as protection. Once a holding company owns its subsidiaries' assets, they are protected if the subsidiary fails or is sold off. 
• Management efficiency: having a holding company allows you to centralise all of the administrative, marketing and financial decisions for your group of companies. Each subsidiary can then effectively ‘lease’ the centralised team’s time – saving the cost of each one needing an in-house team. 
• Tax benefits: one of the main benefits of a holding company comes through all of the tax advantages they unlock. Subsidiaries can pay dividends to holding companies without any corporation tax liability. Property can often be moved within a group without stamp duty obligations. Stamp Duty Land Tax (SDLT) group relief applies only if specific conditions are met, such as the companies being in a 75% group relationship and no disqualifying arrangements being in place. There is also a scheme known as ‘substantial shareholding exemption’, which exempts a holding company from capital gains tax when disposing of shares in a subsidiary. To maximise the benefit of these tax rules, you should seek the advice of a professional accountant such as one of the team here at Crunch. 

How to set up a holding company in the UK

If you’re interested in setting up a holding company in the UK, you can read our guide to setting up a limited business as many of the steps are similar. In brief, however, the steps are:

1. Choose a company name and structure. The majority of holding companies are private limited companies. Before 2015 you weren’t allowed to use ‘holding’ in a company name, but can now include it without needing permission. 
2. Register your business with Companies House by providing your company name, registered office address, statement of capital, details of shareholders and directors your memorandum and articles of association. 
3. Appoint any directors or stakeholders named in the application and begin carrying out duties. 
4. Once registered, depending on your current banking situation, you may need to open a new business bank account for the holding company. 

Tax benefits of holding companies

The tax advantages associated with a holding company are one of the main reasons companies choose to use them. We’ve already touched on them briefly, but here’s the full list:

1. Dividend exemption

Dividends received by a UK holding company from its subsidiaries (both UK and overseas) are typically exempt from corporation tax, provided certain conditions are met. This avoids double taxation on profits.

2. Capital Gains Tax exemption (Substantial Shareholding Exemption)

Under the Substantial Shareholding Exemption (SSE), capital gains made from selling shares in a subsidiary are exempt from corporation tax if the holding company has held at least 10% of the subsidiary's shares for 12 consecutive months in the past 6 years.

3. Group relief

Losses from one group company can be offset against the profits of another company within the group, reducing your overall tax liability.

4. Interest deductibility

Interest payments on loans used to acquire shares or fund subsidiaries may be deductible for corporation tax purposes, subject to anti-avoidance rules.

5. Withholding tax reduction

Dividends paid from UK companies to holding companies are generally not subject to withholding tax. Additionally, tax treaties may reduce withholding tax on dividends, interest, or royalties received from foreign subsidiaries.

6. VAT Group registration

A holding company and its subsidiaries can register as a VAT group, which means no VAT is charged on transactions between group members, improving cash flow and simplifying administration.

This is true, only if the holding company is making or intending to make VAT able supplies. A pure holding company (one that only holds shares) is not eligible for VAT group registration unless it actively manages subsidiaries.

7. Asset protection

A holding company can ring-fence valuable assets (such as intellectual property or property investments) from trading risks by holding them separately.

8. Inheritance tax planning

Holding companies can form part of estate planning strategies to help mitigate inheritance tax, especially when structured with family trusts.

{{cta-newsletter}}

Examples of UK holding companies

Some of the UK’s most famous brands operate holding companies. These include the likes of: 

• Tesco PLC: Tesco has multiple parent companies with their own subsidiary companies. This splits the risk into a diversified range of groups and includes brands such as Tesco Personal Finance PLC, Tesco Property Holdings Limited, and Tesco Stores Limited. 
• Octopus Group: Octopus is famed for its Octopus Energy subsidiary, but it also owns Octopus Money, Octopus Investments, Octopus Real Estate and many other brands. 
• Virgin: Richard Branson’s brand is a great example of a successful group of companies that operates under the ‘Virgin Group’ parent company. Brands include Virgin Active, Virgin Hotels, Virgin Bet and many more. 

Let's take a closer look at Unilever to explore the structure in more detail and show why you may use it.

Unilever

One of the world’s biggest consumer packaged goods companies, Unilever PLC is a famous holding company that owns brands such as Dove, Toni & Guy, Ben & Jerry’s and many more. In 2020, the brand merged its Dutch Unilever N.V. company into Unilever PLC to form a single holding company that controls all of its subsidiaries. 

This reduces operational complexity and makes it far easier for the company to make strategic portfolio changes and control all governance matters from its centralised PLC. 

Is a holding company right for you?

Though international brands famously utilise holding companies, some smaller businesses can unlock more tax advantages and more efficient management setups by restructuring into a group of companies managed by a single parent company. 

Not only can it help you reduce tax obligations, but it also allows you to centralise management and minimise the risk associated with individual companies. 

But, as with any important business decision, it is not something you can take lightly. We recommend consulting multiple advisors, such as a legal professional, a business planning expert, and an experienced accountant, before considering setting up a holding company. 

Get dedicated accountancy advice whenever needed and make better operational decisions with Crunch Premium Plus. Click here to lean more. 

‍