Many entrepreneurs have shareholdings in more than one business. Or they may own a trading business but also have investments – in property perhaps – held in another company.
A question we often come across is whether it is better to hold everything under a single holding company as one corporate group, or whether all shareholdings should be held personally. Or somewhere in between. It is very easy for a structure to build up gradually over many years, without much overall strategic planning being undertaken, only to find out (sometimes too late) that it would have been better to have structured things differently.
There are a whole host of factors which can affect these decisions – lender security requirements, accounting presentation, ease of administration, and so on, but in this paper, we will look at some of the tax considerations at play. As we will see, the answer is not always clear cut and there is no one-size-fits-all solution.
For simplicity let’s suppose we have a UK resident individual who owns a UK holding company. Under the holding company are a number of UK trading subsidiaries.
One big advantage of the group structure is that profits can be passed up the holding company as tax-free dividends. Further, if a subsidiary is ever sold, then as long as it is a trading company which has been held for at least a year, and as long as the holding company had at least a 10% shareholding, any gain on sale may be exempt from tax under the Substantial Shareholding Exemption rules.
These rules mean that, as long as funds are retained within the group, the only ongoing tax charges will be corporation tax on each company’s annual profits – currently at 19% but due to increase to 25% (subject to some reliefs where profits are low) from April 2023.
In addition, the “group relief” rules allow taxable profits and losses to be offset within a 75%+-ownership group, so in broad terms corporation tax should normally only be payable on the overall group net profit in any year.
There are, however, a number of disadvantages of a group structure. One important point is that, if a subsidiary is sold, there is no easy way to return the proceeds to the owner personally without paying tax at dividend rates (up to 39.35%). Whereas if the shares of the company which was sold had instead been held personally, capital gains tax at (usually) 20% would have been payable.
Another disadvantage is that a subsidiary will be under the control of the holding company, making it ineligible for (a) tax-advantaged investment reliefs such as SEIS or EIS for any external investment which is raised, and also (b) tax-advantaged share schemes such as EMI. Any such reliefs would only be available for shares in the holding company, which may not be commercially appropriate in all situations.
The advantages and disadvantages of holding shares personally are the inverse of the group situation.
Tax-advantaged investment reliefs such as SEIS/EIS and share schemes such as EMI may be available. And in the event of a sale of a company, CGT will be payable by the owner at a maximum of 20%, with the net proceeds held personally.
However, there is no group relief offset of profits and losses for corporation tax purposes. And any profits distributed to the owner will incur tax at dividend income tax rates, even if the funds are then reinvested into other businesses.
Where there is a mix of trading and non-trading activities, the available of Inheritance Tax (IHT) Business Property Relief (BPR) will also be a factor in the choice of structure. At worst, the wrong structure can result in no BPR being available and the value of the whole group being subject to IHT if the owner dies, even where there are substantial trading activities. On the other hand, careful planning can result even in some of the value of any investment assets being sheltered from IHT.
Businesses evolve over time, and so do group structures. Quite often it is found that a shareholding structure is no longer optimal, either because it has grown up over time without much planning, or because the reasons and priorities underlying the original structure have changed or been superseded.
It is quite possible to change a group structure, either to bring together companies currently held personally into a group, or to demerge businesses from a group into separate holdings. Neither process is straightforward, and specialist tax and legal advice are essential. Advance clearances from HMRC, to confirm that no unexpected tax charges will arise, are often advisable. However the effort is often worthwhile if the benefits from the new structure are big enough.
One word of warning, though. Depending on what is proposed, HMRC will sometimes refuse to give clearance if a sale of part of a group is in the offing, and they believe that the reorganisation is being undertaken to avoid or reduce tax. Advance planning is therefore essential, so that any reorganisation is undertaken well before any sale process is contemplated.
One final thought. Can you have a structure which gives corporation tax group relief for profits and losses, the ability to recycle post-tax profits into other parts of the business without further tax charges, and the ability to extract profits at capital gains tax rates when a subsidiary is sold ?
Well maybe, and sometimes. But it needs a lot of advance planning, preferably from the outset or at least well before any part of the business grows too much in value. But even where this holy grail is not achievable, there is still a lot of value to be unlocked in any group structure, by tailoring it to deliver those benefits which are the most important ones in that case, bearing in mind the owner’s plans and aspirations.
If you have been affected by any of the issues raised in this paper, do get in touch with one of the Claritas team.
We hope that you find this briefing note helpful. However please note that it has been prepared for awareness purposes only and, as such, represents only a high-level and simplified summary of the rules. It does not constitute advice and is not a substitute for taking proper advice tailored to your specific circumstances.
To find out more about what we do, please get in touch.