Establishing a holding company in the United Kingdom can confer considerable practical and financial benefits. The UK is now seen as one of the most desirable locations to form a holding company, given the ease of doing business here, the beneficial tax regime and the stable legal, economic, and political environment. In this article we will explain what is meant by a holding company, the advantages and disadvantages of a holding company, the legal requirements of a UK holding company, the tax regime for holding companies, and how to register a new holding company in the UK.
What is a holding company?
A holding company can be thought of as a parent or umbrella to control one or more subsidiaries. Holding companies focus on the ownership and handling of assets, investments, and management within subsidiary companies rather than providing goods and services in their own right. Holding companies tend to be limited by shares.
The main functions of a holding company in the United Kingdom are the following:
- Acquisition of shares in subsidiaries
- Receipt of dividends arising from shareholdings
- Defence of itself and its subsidiaries against takeovers
- Disposal of shares in subsidiaries
A company is a subsidiary if a holding company owns 50% or more of its assets. These assets can include shares, private equity funds, publicly-traded stocks, bonds, property, machinery, other companies and intellectual property such as designs, patents and trademarks. A holding company and one or more subsidiary companies that it controls is referred to as a “group” of companies. A group of companies can be structured in one of several ways, including:
- A vertical group: Consists of a parent company with a subsidiary below the parent. The next subsidiary is placed below the first subsidiary at a lower level of hierarchy – and so on for each additional subsidiary.
- A horizontal group: With one parent company and a number of subsidiaries below the parent company all at the same level.
- A hybrid group: A mixture of vertical and horizontal.
The reason why holding companies are registered and set up in the first place is due to the many advantages they afford, including asset protection, tax benefits, shared costs and an overall reduction in business risk.
Following changes to the rules on company and business names made at the end of 2015, it is possible to use the words “holding” or “holdings” within a company name without gaining prior permission from Companies House. One very famous example of a UK-headquartered global holding company is Rolls Royce Holdings plc which has nine subsidiaries, including Rolls-Royce North America, Rolls-Royce AB, and Rolls-Royce Deutschland.
What are the legal requirements of a holding company?
Under section 1159(1) of the Companies Act 2006 a company is legally considered to be a parent holding company of a subsidiary if it:
- Holds the majority of the voting rights in it, or
- Is a member of it and has the right to appoint or remove a majority of its board of directors, or
- Is a member of it and controls on its own, under an agreement with other members, a majority of the voting rights in that company.
What are the advantages and disadvantages of a holding company in the UK?
UK holding companies confer considerable advantages, including:
- Tax benefits – see below for details on the tax advantages of a UK holding company
- Centralisation of functions and assets – a parent company is often created as a means of holding important functions or assets which can be shared across subsidiary companies. For example, this structure would allow a holding company to own vital IP that can be used by a number of subsidiaries serving different markets.
- Risk/asset protection – holding companies allow for efficient management of assets, including property, cash or trademarks. Such assets can be easily transferred under the umbrella of the holding company to provide protection from higher-risk trading entities. By adopting this type of business structure, assets can be protected from legal proceedings, debts or other liabilities.
- Business continuity – holding companies make it possible to continue trading in the event that a subsidiary company fails as long as the holding company owns the key assets, e.g. machinery.
The disadvantages of a holding company include:
- Complexity of administration – holding companies require a greater level of administration because each subsidiary under the parent must keep a separate set of books, create a set of annual accounts and fulfil the reporting requirements defined by Companies House. This can be more complicated when money is transferred within the holding company structure.
- Potential for management conflict – the flip side of the ability to exert management control over subsidiaries is the greater potential for management disagreement.
What are the tax advantages of a UK holding company?
One of the primary reasons for establishing a holding company in the UK is tax efficiency. No withholding tax is payable on dividends from UK companies, and any dividends paid by subsidiary companies to holding companies are exempt from Corporation Tax. Some of the other tax advantages of a holding company are as follows:
The UK’s Tax Treaty Network
The UK is a popular choice for international businesses when deciding where to establish a holding company. According to the UK government there are over 3,000 double taxation treaties worldwide, of which the UK has the largest network spanning 120 countries. This provides a number of tax advantages, just one example being if a UK-based company owns over 10% of the issued share capital of an overseas subsidiary, in which case the withholding tax on dividends from the subsidiary is reduced by half to 5%.
Capital Gains Tax
If a holding company disposes of a subsidiary then no capital gains tax is payable where the “Substantial Shareholdings Exemption” (SSE) applies. For the SSE to apply the holding company must own a minimum of 10% of the ordinary shares in the subsidiary and have held these continuously for 12 months or more in the two years immediately prior to disposal.
Group relief can be highly beneficial since it allows companies that are making losses on corporation tax to share those losses with other parts of the group.
Holding companies are exempt from VAT on taxable supplies if they perform only the following basic functions:
- Acquisition of shares in subsidiaries.
- Receipt of dividends arising from shareholdings.
- Defence of itself and its subsidiaries against takeovers.
- Disposal of shares in subsidiaries.
Tax-free transfer of assets
Assets can be freely transferred between subsidiary companies under the umbrella of a holding company without the need to pay tax. This allows any subsidiary to move assets to another subsidiary as and when needed.
How do I register a holding company in the United Kingdom?
While the purpose of a holding company is different from that of its subsidiaries, the process of registering a holding company mirrors that of registering a private company or a company limited by shares. The first step is to register the holding company with Companies House online. You will need to provide a minimum of three items of personal information relating to yourself and your shareholders, such as town of birth, mother’s maiden name, father’s first name, telephone number, national insurance number and passport number. In addition, you will need to provide the following details for your holding company:
- Company name
- Registered office address
- Standard Industrial Classification codes (SIC)
- Details of at least one director
- Details of at least one shareholder
- Details of the company secretary, if you have one
- Memorandum and articles of association
- Share capital arrangements
- Details of the person or persons with significant control (PSC).
Uniwide Formations can handle the company formation process for your new holding company, ensuring this is completed in accordance with the law. We can complete your holding company registration in a matter of hours and will send your documents of incorporation by e-mail as soon as they are provided by Companies House. We can also explain all of your legal obligations as a holding company, including your filing obligations (i.e. confirmation statements and annual accounts).
Holding companies offer considerable advantages, but this type of business structure is not appropriate in all cases. For anyone considering a group structure, it is important to seek professional guidance from a specialist in company law and formations. To determine whether you need and will benefit from a holding company, first consider whether you have a real need to ringfence your assets, whether your business faces risks that can be mitigated through a group structure and whether you are likely to benefit from the tax advantages available. If the answers to these questions are “yes” then a holding company may be right for you.
Uniwide Formations is a UK-based professional business service provider with expertise in the registration and formation of limited companies and LLPs, including holding companies. We can advise you on the appropriate business structure for your commercial needs, handle the process of setting up your holding company to control other subsidiary companies, draft your articles of association, and explain how to meet your reporting and filing requirements with Companies House.