Holding companies and group structures: what they do and when they're worth it

Most limited companies begin as a single company that does everything. It trades, it holds the cash, it owns the van or the building, and it carries all of the risk. In the early years that is usually the sensible arrangement, because it is cheap to run and easy to understand.

As the business grows, the picture changes. Profit starts to build up that you would rather not draw out as dividends and pay tax on. You buy the unit you had been renting. You start a second venture, or a business partner wants their own share of things. Somebody raises the idea of selling in a few years' time. Once a business reaches that stage, keeping everything in one company can cost money and leave valuable assets exposed, and a group structure with a holding company at the top is often the better arrangement. Below we explain how it works, when it is worth doing, and what tends to go wrong.

What a holding company is

A holding company is an ordinary limited company whose purpose is to own shares in other companies instead of trading itself. You own the holding company, and the holding company owns your trading company, or several of them. Day to day, nothing about the trading company changes. It keeps its name, its contracts, its staff, its VAT and PAYE registrations and its bank account.

What changes is what sits above it. Dividends paid by a subsidiary to its parent company are normally exempt from corporation tax, so profit can be moved out of the trading company without creating a tax charge. Anything the holding company then holds, whether that is cash, property or investments, belongs to a separate legal entity and is out of reach of the trading company's creditors. If the trading company were sued or went under, those assets would be protected.

The reason people do this is to separate the part of the business that carries the risk, which is the trading, from the parts that hold the value, such as property, surplus cash or a second business.

When it is worth setting one up

There are four situations where we most often recommend it.

The first is when you own your premises or are about to buy them. If the building is owned by the same company that trades from it, a large claim or a bad contract could put the building at risk. Holding the property in a separate company and letting it to the trading company keeps it safe, and the rent, provided it is set at a market rate, is an allowable cost for the trading company.

The second is when profit is accumulating that you do not need to take out. Leaving it in the trading company leaves it exposed. Paying it up to a holding company costs nothing in tax, and from there it can be invested, lent back to the business or used to buy another one, all outside the trading risk.

The third is when you run more than one business, or when a business partner wants to separate their interest. Two trades in one company share a single set of accounts, a single tax bill and each other's liabilities. Putting each into its own subsidiary under one holding company gives each business its own figures and its own risk, and makes it far simpler to sell or split one off later on.

The fourth is when you can see a sale coming. The sums involved here can be large, and we cover it separately below.

The tax reliefs involved

A holding company is usually put in place using what is called a share-for-share exchange. You give up your shares in the trading company and receive shares in the new holding company in return. Provided the conditions are met, the tax rules treat this as if no disposal has taken place, so there is no capital gains tax to pay on the exchange. If the conditions are not met, HMRC can treat it as a sale at market value, and you would be taxed on a gain even though you received no money.

The main condition is that the exchange is carried out for genuine commercial reasons and not primarily to avoid tax. The standard way to deal with this is to apply to HMRC for advance clearance before the exchange takes place. HMRC then confirm in writing that the reliefs apply. We would not carry out a restructure without doing this.

Once the group exists, other reliefs become available. Dividends can be paid up the group without corporation tax, as mentioned above. If one company in the group makes a loss, group relief allows another company in the group to set that loss against its own profits for the same period. And if you later sell a subsidiary, the substantial shareholding exemption can exempt the whole gain from corporation tax, as long as the holding company has owned at least 10% of the subsidiary for a continuous period of twelve months and the company being sold is a trading company.

Stamp duty on the share exchange can usually be relieved where the shareholdings in the new holding company mirror the old ones, although the conditions are strict and the relief has to be claimed.

The mistakes we see

The most frequent problem is the effect of associated companies on corporation tax. Corporation tax is charged at 19% on profits up to £50,000 and 25% on profits over £250,000, with an effective marginal rate of 26.5% in between. These thresholds are divided between all the companies under common control. With a holding company and one trading subsidiary, each company reaches the 25% rate at £125,000 of profit instead of £250,000, and with three companies the figure falls to £83,333. If nobody has worked through the numbers, a structure intended to reduce tax can end up increasing it.

Another is proceeding without HMRC clearance or a documented commercial reason. If a share-for-share exchange is carried out purely because someone read that it was tax free, with no clearance obtained and no business reason recorded, it falls squarely within the anti-avoidance rules. The outcome can be a capital gains tax bill based on the full value of the company, with no cash available to pay it.

A third, which tends to surface late, concerns business asset disposal relief. This reduces the capital gains tax rate on a qualifying sale to 18%, compared with the standard 24%, on the first £1 million of gains over your lifetime. To qualify, you personally need to have held at least 5% of the shares and voting rights, and to have been an officer or employee of the company, throughout the two years before the sale. A restructure that alters who owns what, or that puts an extra company between you and the trading company, can restart or break that two-year period, and this is often only discovered when the sale is being completed.

Inheritance tax relief can also be affected. From April 2026, business property relief provides 100% relief on the first £1 million of qualifying business assets and 50% relief above that. A trading company qualifies. A holding company that mainly holds cash and investments may not, because it can be treated as a business that is wholly or mainly investment, and surplus cash that the trade does not need can be excluded as an excepted asset. Where money is held within the group, and what it is used for, therefore affects whether your family would pay 20% inheritance tax on it.

There are also running costs to consider. Each company in the group needs its own annual accounts, corporation tax return and confirmation statement, and a group may also need consolidated accounts and a VAT group registration. These costs are modest compared with the value being protected, but they are real, and they are a good reason to avoid setting up a group unless it is needed.

Separating the premises from the trade

The restructure we carry out most often is moving the premises into a separate company. The building comes out of the trading company, or is bought directly by a new property company, and the trading company pays rent to occupy it. The building is then protected from trading risk, the rent is an allowable cost, and if the trade is sold later on the buyer can take the business without the property, which is usually what buyers want.

The detail is where care is needed. Transferring an existing property between companies can give rise to capital gains tax, stamp duty land tax and VAT, depending on how it is done, so the sequence of steps and the reliefs available need to be worked out before anything is transferred. The rent must be set at a market rate and documented in a lease. If the property has been opted to tax for VAT purposes, that election follows the property. And the lender will need to consent, since the mortgage is normally held by the company that owns the building.

What happens when you sell

If you sell your trading company personally, you pay capital gains tax on the proceeds at 24%, or at 18% on the first £1 million if business asset disposal relief applies. If instead the company is sold by a holding company that qualifies for the substantial shareholding exemption, the gain is exempt from corporation tax and the full proceeds are received by the holding company with no tax deducted.

Those proceeds can then be used to buy another business, to build a property portfolio, or to be drawn out over a number of years in whatever way suits your income and your tax planning, instead of being taxed in a single year at the highest rate. For an owner who expects to sell within a few years this is frequently the most valuable piece of planning available. The exemption only applies if the structure has been in place and the conditions have been satisfied for the qualifying period, so it needs to be set up well before a buyer is on the scene.

How we approach a restructure

We begin with the figures, before anyone draws a structure chart. We take your profit, your drawings, any property, any other businesses and your plans for the next five years, and build a model showing what a group would save, what it would cost to run, and how the associated companies rules would affect your corporation tax. If the conclusion is that a group would not pay for itself at this stage, we will tell you that.

If it would, we document the commercial reasons, submit the clearance applications to HMRC and wait for the responses, arrange valuations where these are needed, and work alongside your solicitor on the share exchange, any leases and the Companies House filings. After that we look after the group on an ongoing basis: the accounts and tax return for each company, the overall group position, and the planning of salaries and dividends across the whole structure.

All of this is carried out for a fixed fee agreed before we start, by an AAT-licensed practice that has done this work for business owners in Kent and across the UK. There is no hourly billing and there will be no unexpected bill at the end. Our company structuring and holding companies service sets out what is included.