What is a UK holding company? What are property investment companies? Buying Property In A Limited company Vs Personal name Set up a Property Company How to take money out of a limited company Using a company car Holding Companies Group Structure Corporation Tax Calculator We are not going to discuss the benefits of a limited company being part of a tax group structure. We have previously discussed the tax benefits of extracting money out of a limited company. There are tax benefits when using a holding company group tax structure that owns multiple UK limited companies. There are many people who want to know what is a holding company UK and how it can benefit them – Minimising risk rather than using just one limited company – Transfer of money between UK limited companies and indeed foreign companies – The movement of fixed assets free from Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT) Conversely, it may be difficult to perform tax planning if someone has multiple companies. Which companies should you take out for wages and dividends paid? This is a frequently asked question. This can cause problems when you work with Joint Venture (JV) partners and you all want to extract money out of the limited com[any as director wages or shareholder dividends. For example, you have three companies with JV partners and they all wish to take dividends, forcing you to do the same. That can cause you a tax nightmare. Having a holding company means all dividends paid are passed from each company to the holding company tax-free. That means you only have to worry about how much money (wages & dividends paid) you extract personally from the holding company. Using limited companies in a group holding structure has manat tax benefits. You may have multiple companies because of flips or trades. A holding company may be a solution to minimizing administration and confusion. This means that the holding company owns all other companies. Property developers will open one limited company down when a building project has been sold. This helps the property developer to minimise risk and benefit from the tax benefits. Companies are associated if it is owned by another or two or more companies are owned by the same company. One company will be deemed to have control over another if it: – owns more than 50% of the shares or – has 50% of the voting rights or – has a right to receive 50% of the distributable profits A dividend distribution from one company (subsidiary) to the holding company will be free from corporation tax. This is irrespective of the amount distributed. However, please remember that an individual can only take the £2,000 tax-free dividends. Hopefully, we have now started to answer the question: What is a holding company UK? Be sure to use our free online corporation tax calculator to see how much you need to pay to HMRC as a UK limited company owner. Holding companies and group loss relief tax benefits Provided that a holding company owns 75% or more of a subsidiary then any losses generated by the subsidiary may be passed up to the holding company. This will reduce the taxable profits of the holding company. These losses must be apportioned so that the losses are applied against the same accounting dates. The loss may not be carried forwards or backwards in the holding company. Losses must be only claimed in the same accounting year. A holding company would first utilise the brought forward losses before utilizing the losses from its subsidiary. It is also possible for other subsidiaries in the same group structure to claim the losses from the subsidiary in question. It is not just the holding company that may benefit from the loss relief. Losses may only be utilised where the company belonged to the group in the accounting year. This means that losses may need to be time apportioned of when the company joined the group to either surrender its losses to a fellow group company or to claim the loss. The same rules apply whereby a company has an agreement to leave the group. Any losses in the same current accounting period from selling assets may also be utilised in the same way as above but must be made within two years of disposal. Any losses incurred pre-grouping must be only used within the company that incurred the loss. Our property accountants have managed to save their clients tax by understanding the basics of loss relief. This is a great way to reduce overall profits and corporation tax liabilities. Tax reclaims or credits would not be allowed if one limited company, which was not connected to another, made a loss. The same person that owns a second limited company would have a tax liability if the second company made a profit. This is because the unconnected companies can not offset losses against the profit of another. We hope that you can start to see the holding company tax benefits. So, what is a holding company? It is a tax-efficient structure that allows money to transfer from one company in a group to another. SDLT & VAT for transfer of assets between group companies Another holding company tax benefit is SDLT. There are no SDLT charges for assets transferred from one company to another within a group. If a company that receives an asset leaves the group within three years will have to pay the SDLT. Unconnected companies that wish to transfer properties between them would have to pay residential rates of SDLT or commercial rates of SDLT even if they are ultimately owned by the same person(s). The creation of a holding company allows property transfers to be made without this SDLT liability. There are no VAT implications for transferring assets from one company to another. However, consideration needs to be given where the asset has opted to tax. Selling shares of a holding company & Entrepreneurs Relief IER) (Now Business Asset Disposal Relief - BADR) If you sell your shares to the holding company then you may be subject to Capital Gains Tax (CGT). You cannot claim holdover relief for investment company shares. You will have CGT liabilities based on the deemed profit of the shares less CGT annual allowances. Entrepreneur’s relief may be claimed if the holding company is a trading company as well as its subsidiaries. Entrepreneur’s relief may not be claimed if the holding company or its subsidiaries were set up for investment purposes. Entrepreneurs’ Relief when selling a business is a preferential Capital Gains Tax rate of 10%. To qualify for entrepreneur tax relief you must satisfy the below criteria: – The person claiming ER has at least 5% of voting shares in the business which is being partially or fully closed down. – The person claiming ER has owned the shares in the business for at least 12 months. From April 2019 this will increase to 24 months – The business on which ER is being claimed is a Trading business (ie not property rental business, bank interest or stocks and shares trading income) or it is the holding company of a trading group within the last 12 months. Again from April 2019, this period will increase from 12 months to 24. – The person claiming ER works in the business (ie is not a “sleeping partner”). Since the autumn 2018 budget announcement two additional tests have been introduced, with immediate effect: In addition to giving the holder at least 5% of the votes, the ordinary shareholding must also give at least: – 5% of the company’s distributable profits available to ordinary shareholders; and – 5% of assets in a winding up. Please remember that the shareholder must also have worked in the business as a director or an employee. This applies especially to structures involving growth shares or preferred ordinary shares. This also applies where a share class has preferential dividends or winding uprights. The benefit of the entrepreneur’s relief is that the tax rate of closing down a UK limited company would mean that a Capital Gains Tax (CGT) tax rate of just 10% would be applied, after the annual CGT annual allowances. Upon the closure of each SPV, the money would be returned to the holding company. When the property developer finds another exciting building project they would create a new SPV/subsidiary limited company underneath the holding company. This effectively is a group tax structure. Entrepreneurs relief (ER), Business Asset Disposal Relief (BADR) and Targeted Anti Avoidance Rules (TAAR) Property developers used to open up one limited company and close it after a project was completed. Upon closing the company, the property developer would take the money out of the limited company and pay 10% CGT, as explained above. However, HMRC introduced Targeted Anti Avoidance Rules (TAAR) that prevented property developers that owned UK limited companies from opening and closing similar companies within a two-year window. The reason that HMRC introduced TAAR was that they felt property developers were getting an unfair tax benefit compared to the everyday person that pays income tax on the money they owned, and CGT rates are 10% for basic rate taxpayers and 20% for high rate taxpayers. Property developers that had the option of opening and closing down similar UK limited companies were getting a reduced CGT rate of 10%, even if they were high-rate taxpayers. You may have come across the term “Special Purpose Vehicle” or “SPV”. This SPV legal entity is nothing more than a limited company. A subsidiary is a limited company that is owned by another limited company, normally referred to as a holding company. The most simple approach to solve the issues surrounding TAAR is to create a UK holding company within several subsidiary limited companies or SPV underneath. Once all the projects are completed, the property developer can then close down all SPVs/subsidiary companies and the holding company and eventually claim what was called Entroeenuer’s Relief (ER) bit not termed Business Asset Disposal Relief (BADR) at 10% without the fear of HMRC making claims of tax evasion. Holding company tax benefits gets around the issue of TAAR. Selling a property development company example We will look at David and Davina who are husband and wife and are property developers. They set up a limited company and wanted to de-risk their business and set up individual Special Purpose Vehicle (SPV) for each property development. If anything should happen from a legal or financial perspective then the liability will be limited to the company, hence the name. This is of course providing that they have not provided a personal guarantee. They tend to set up two limited companies per year as they look to buy and sell properties within 9 months. They have asked the question, how do I minimise tax when selling a property development company? One of the property development companies had a profit of: £200,000 sales price of the building less sales fees £100,000 of buying the property that was sold £50,000 refurbishment costs £50,000 profit £9,500 corporation tax liability assuming 19% £40,500 cash left in the business to be taken out (ignoring shareholder funds) As high rate taxpayers that pay 20% CGT on selling their property development company, this would amount to £8,100. Hopefully, you will see that the total tax on this property development company is £17,600 Capital allowances within a group structure, another holding company tax benefit Typically businesses receive an entitlement of £250,000 Annual Investment Allowance (AIA) per the government website but only one claim may be made for the entire group irrespective of how many companies it may contain. No annual investment allowance or first-year allowance is available if acquired from a ‘connected person. I am sure that one of our property accountants will be able to help you with these strategies. Practical steps you should now take to set up a tax efficient group structure It is one thing to understand the theory but it is another to put it into practice. This is why I have written a step-by-step guide to implementing this strategy: 1. Set up a holding company structure using alphabet shares to ensure the owners can extract money out of the limited company in the most tax-efficient way. 2. Set up individual Special Purpose Vehicles (SPV) subsidiary companies that are 100% owned by the holding company. 3. Close down the SPV upon the building project being completed and move the money back up to the holding company. 4. Repeat steps 2-3 for each project 5. Close down all SPVs and the holding company 6. Extract the cash out of the holding company and claim Entrepreneur’s Relief (ER), now termed Business Asset Disposal Relief (BADR) at the 10% rate for Capital Gains Tax (CGT). See how easy the above is? You can hopefully now see that there is no need to set up limited companies for each property or each joint venture. If you are thinking about setting up a limited company to do flips then you may need to consider whether you need to be Construction Industry Scheme (CIS) registered.