By Simon Misiewicz
Article relevant to the tax year 2018/19
Do you know how a holding company works?
Is it time that you got a holding company in place?
Work with one of our property accountants to set up your tax-efficient holding company.
We are not going to discuss the benefits of a limited company as we have done this in this article. However, as we discuss in another article that it is sometimes beneficial to open multiple limited companies for the purposes of risk mitigation and tax planning.
Conversely, it may be difficult to perform tax planning if someone has multiple companies. Which companies should you take out for wages and dividends? This is a frequently asked question.
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. The reason for this is to minimise the extraction of cash and reducing the level of income tax. This is one of the specialist areas for our property accountants.
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 are passed from each company to the holding company tax-free. That means you only have to worry about how much money (wages & dividends) you extract personally from the holding company.
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.
Holding companies and group loss relief
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.
Transfer of assets from one company to another in a group
A company that transfers assets from one company to another will not have to pay corporation tax. This is irrespective of how much money has been paid for the asset or how much the asset is actually worth. The only time that corporation tax is payable on the asset is sold to someone not connected to the group.
The transfer of the asset is accounted for based on the original base cost plus any indexation increase in value.
There is a de-grouping tax charge on any asset that is transferred between group companies with a six-year period that a company leaves the group, for whatever reason. The tax charge will be based on the proceeds or market value that the asset was worth at the point of transfer less the cost to the group less any indexation allowance.
If a holding company creates a new subsidiary it can pass assets used for the purpose of trade down to a new company. This may be done without any tax charges even though the shares are less than 12 months. This is provided that the asset in question has been used for trade purposes in the last 12 of the previous 24 months.
Download your property tax guide here written by our property accountants
SDLT & VAT for transfer of assets between group companies
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.
There are no VAT implications of transferring assets from one company to another. However, consideration needs to be given where the asset has been opted to tax.
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 it’s subsidiaries. Entrepreneur’s relief may not be claimed if the holding company or its subsidiaries were set up for investment purposes. An example being a company that buys property to generate rental income. These activities would be taxed under normal capital gains tax rules.
Capital allowances within a group structure
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 straegies.
Too many limited companies causes mayhem
There are many property investors who are using limited companies in the wrong way. They are mixing up trade activities with investment holding companies. There are also some property investors who have more than three limited companies because they have set up a limited company for each property deal/joint venture.
The issues with having lots of limited companies in the wrong structure can be seen below:
• An administrative nightmare to look after each limited company with receipts and paperwork, something I outlined in a previous article
• Several bookkeeping spreadsheets/online systems
• A wallet/purse full of company cards and always having to make sure you use the correct one
• Multiple bank accounts and bank statmenets
• Additional accountancy costs for the annual accounts
• Filing of several annual returns
• Difficulty with tax planning as you are personally receiving wages/dividends from different sources
Can you relate to the above?
Can you see how things can get really messy?
If you have answered yes to these questions then keep reading for some solutions.
A real life client example — setting up too many companies
For the purpose of this article we are going to name my client John to protect his identity.
John has more than 20 properties, some of which are in his name and some of which belong to his 15 limited companies. John is buying properties but not thinking with the end in mind, so he buys them all in separate limited companies. He is working with different joint venture partners and decides to set up one limited company for each one.
Within his own limited company he is mixing buy to hold properties with buy to sell in the same company.
All in all the 15 limited companies are simply tying him up in knots with paperwork, administration, constant phone calls to his accountant to discuss the year end and filing annual returns. This leaves him with little time for himself and his family or to develop his business. He has now become an administrator and is consequently annoyed and frustrated.
The issue with mixing up buy to hold and buy to sell properties within a limited company can be quite harmful because:
• When you flip there is a degree of risk. Your other properties are at risk if everything goes wrong with that property flip and it creates a significant liability which is greater than the value of the property.
• If you mix up buy to hold and buy to sell then you lose the right to claim entrepreneurs’ relief.
Practical steps you should now take to set up just two limited companies
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 implement this strategy:
1. Set up a limited company for you that holds property as a long-term investment
2. Set up another limited company if you are looking to buy and sell (flip) properties
3. Agree with joint venture partners that they can have a charge over the property purchased that ensures that they get a percentage of profit and/or a percentage of the uplift in market value. They do not need to be a shareholder of either of your limited companies.
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. If you are buying properties to sell and making significant changes to then read this article to work out where you stand on CIS.
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