Starting a holding company

My accountant has suggested I consider opening a holding company to take profits out of my main business. I have tended in recent years to pay the corporation tax, take small dividends, with the result being the balance sheet increases each year and consists primarily of cash in the bank. We don’t have many other assets. No property owned within the business for instance.

We are talking hundreds of thousands, not millions. I like having liquid cash to enable us to maintain our very good reputation within our field for paying on time or early, but we have far more than we require as a trading float. 

It was only a suggestion for me to consider, he didn’t seem particularly convinced either way. I like the idea of moving cash to spread the risk, in case of bad debts, tribunals etc, but wonder what the ‘cons’ could be?


Comments

  • Jeremy535897
    Jeremy535897 Posts: 10,421 Forumite
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    Costs, complexity, possible adverse impact on corporation tax rates, VAT issues, group relief issues. There has to be a clear and significant benefit.
  • CKhalvashi
    CKhalvashi Posts: 12,056 Forumite
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    Costs, complexity, possible adverse impact on corporation tax rates, VAT issues, group relief issues. There has to be a clear and significant benefit.
    I'd agree with this.

    We looked at merging everything under a single umbrella several years ago and couldn't find the benefit there, either tax-wise or operationally. It would actually have increased the amount of tax we'd have paid over the long term as CGT options won't be available under a holding company when you ultimately look to retire, it'll be CT and dividends.

    Make sure you're not saving £1 now to pay £2 later in tax in any option you take. As long as you keep your total income below around £100k, you won't find tax rates too punitive with the dividend option.
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  • Jaco70
    Jaco70 Posts: 177 Forumite
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    Costs, complexity, possible adverse impact on corporation tax rates, VAT issues, group relief issues. There has to be a clear and significant benefit.
    I'd agree with this.

    We looked at merging everything under a single umbrella several years ago and couldn't find the benefit there, either tax-wise or operationally. It would actually have increased the amount of tax we'd have paid over the long term as CGT options won't be available under a holding company when you ultimately look to retire, it'll be CT and dividends.

    Make sure you're not saving £1 now to pay £2 later in tax in any option you take. As long as you keep your total income below around £100k, you won't find tax rates too punitive with the dividend option.
    I sort of understand what you’re saying but it wouldn’t be about lowering the tax burden, just about spreading the risk should something catastrophic happen to the main company. Why would VAT be an issue if all we were doing was moving an amount of money, probably only once annually, from the main contracting company to the holding company?

    I also don’t understand the corporation tax issue? If we made 100k profit, paid 19k CT, then moved say 60k to the HC, what would the issue be? This is not in anyway a criticism, I just want to learn the facts. As I say, my accountant didn’t seem totally convinced either, but he has merged with a larger practice and one of the partners had suggested the idea. 
  • Jeremy535897
    Jeremy535897 Posts: 10,421 Forumite
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    Most issues, like VAT, can be managed, but it is easy to carry out innocent transactions that have unforeseen consequences for VAT and other taxes. That is why it is important to have a good reason for doing it. One example is where there are a number of distinct businesses and it is desirable to keep them separate. The issue you are describing seems to be about taking funds from a company in case something untoward happens to it, so that past profits are protected from future losses.

    If this is the case, you first have to be sure that the insertion of a new holding company would achieve the objective. Many banks and landlords will seek guarantees from the holding company in these circumstances. There also has to be no intent to defraud creditors.
  • Jaco70
    Jaco70 Posts: 177 Forumite
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    Most issues, like VAT, can be managed, but it is easy to carry out innocent transactions that have unforeseen consequences for VAT and other taxes. That is why it is important to have a good reason for doing it. One example is where there are a number of distinct businesses and it is desirable to keep them separate. The issue you are describing seems to be about taking funds from a company in case something untoward happens to it, so that past profits are protected from future losses.

    If this is the case, you first have to be sure that the insertion of a new holding company would achieve the objective. Many banks and landlords will seek guarantees from the holding company in these circumstances. There also has to be no intent to defraud creditors.
    That all makes sense, although I’m not clear where VAT comes into it.
    It is exactly about protecting past profits as you say, and our existing set up is very straightforward. I am a director of just one, long established, limited company with no borrowings and no landlord. My parents own the premises we trade from outright, which we have always used rent free. 
    The balance sheet consists mainly (over 85%) of cash at bank. Not vast amounts of money but far more than we require to trade. And money I would be keen to protect in case of unexpected issues, which will likely never occur. By the same logic I probably won’t ever claim my life insurance, but I like having it.
  • Grumpy_chap
    Grumpy_chap Posts: 14,859 Forumite
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    Jaco70 said:
    I like the idea of moving cash to spread the risk, in case of bad debts, tribunals etc,

    Would your customers of the trading business (Jaco70 Ltd) require Parent Company Guarantees of the holding company (Jaco70 Holdings Ltd), thus negating the benefit you seek but still adding the complexity?

    In the case of any business loans, as well as Parent Company Guarantees, and lender is likely to still require Personal Guarantee from Director / Owner for all the while the business is essentially the gift of an individual or small number of individuals to control.
  • Jeremy535897
    Jeremy535897 Posts: 10,421 Forumite
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    VAT is unlikely to be relevant if the only transaction between the two companies is the payment of a dividend.
  • Jaco70
    Jaco70 Posts: 177 Forumite
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    Jaco70 said:
    I like the idea of moving cash to spread the risk, in case of bad debts, tribunals etc,

    Would your customers of the trading business (Jaco70 Ltd) require Parent Company Guarantees of the holding company (Jaco70 Holdings Ltd), thus negating the benefit you seek but still adding the complexity?

    In the case of any business loans, as well as Parent Company Guarantees, and lender is likely to still require Personal Guarantee from Director / Owner for all the while the business is essentially the gift of an individual or small number of individuals to control.
    I understand the issue of guarantees, particularly when contracting to councils etc, and this is definitely something I hadn’t thought about and need to consider. I’m not sure it will be significant but it does require some thought.
    We’ve never had a loan, other than very occasional directors loans, but not even these for 15 years or so.
  • CKhalvashi
    CKhalvashi Posts: 12,056 Forumite
    First Anniversary First Post Photogenic Name Dropper
    Most issues, like VAT, can be managed, but it is easy to carry out innocent transactions that have unforeseen consequences for VAT and other taxes. That is why it is important to have a good reason for doing it. One example is where there are a number of distinct businesses and it is desirable to keep them separate. The issue you are describing seems to be about taking funds from a company in case something untoward happens to it, so that past profits are protected from future losses.

    If this is the case, you first have to be sure that the insertion of a new holding company would achieve the objective. Many banks and landlords will seek guarantees from the holding company in these circumstances. There also has to be no intent to defraud creditors.
    CT plus dividends from a holding company (on the basis of subsidiary disposal) will always be higher than CGT on the same asset.

    We operate as multiple Ltd companies owned outright by people involved, with no company structured on the top. I am effectively a holding body in my own name in this case.

    There was no reason we could see to do anything in another way unless seeking outside investment, which we tend to do when finances require/when we need to buy expertise on a per project basis on terms negotiated individually.
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