There’s something in the spring air that has inspired many of my clients to shift into high gear with new business ideas.
We work with ambitious entrepreneurs, so new business ideas, spin-offs, and opportunities are always common, but they’ve surged even more over the last few weeks.
This has led to numerous conversations about how to structure a new business. Some clients start by dabbling with a new idea within the framework of their existing company, but this quickly becomes problematic. Consequently, the conversation often shifts to whether they should set up a group structure.
A group structure can mean different things, but loosely, it's two or more companies that are connected, usually through ownership. For the purpose of this post, we are going to talk about a simple Holding Company Structure (HoldCo). This is where one company (HoldCo) sits at the top of the pyramid and owns the shares in the companies below (Subsidiaries). The Individual owners will hold the shares in HoldCo rather than the subsidiaries.
The process of creating a HoldCo and the group structure needs to be carried out carefully and will incur some professional fees. This involves a “Share for Share Exchange” where the existing shareholders in the current company swap their shares for newly issued shares in the HoldCo. So, as the individual owner, you go from personally owning shares in your trading business to holding the shares of the HoldCo, which in exchange owns the shares in the subsidiary - still following?
This mechanism of setting up the structure usually needs to be cleared by HMRC beforehand to avoid any further issues down the line. It means that you don’t have to pay Capital Gains at this point for “selling” your shares in your trading company.
So you have probably already realised that there is a lot to consider and get right when setting up a HoldCo and group structure, so why bother? Well, the reason so many entrepreneurs consider this route is that it offers a lot of benefits in terms of protection and tax reduction. There are some downsides, too, but let’s touch on some of the benefits;
Protection
Protecting your assets is the most common reason we see group structure above the potential tax benefits. If you have worked hard to build up property, excess cash or other assets like trademarks or IP, then you want to make sure that these are protected first and foremost.
If your assets are inside your main trading company and something goes wrong, you are sued, you have debt issues, etc., then your assets are all, in theory, up for grabs. If you have ringfenced those assets and they sit within their own Limited Company within the group, then they are unlikely to be accessible to anyone making claims against your trading business.
For this reason, if you want to take out a mortgage against property within your company, the lender will most likely want to see this property outside of your trading company. Especially if the property is not a trading premises of the business.
Rewarding key people
Let’s say you have two different trading businesses within your group. You have a key person heading up each of these businesses, and they have very little interaction or influence on the other. You probably don’t want to give them shares in the overall group.
A group structure gives you options to reward these people with equity (shares) in the business they oversee.
So CoA could be 90% owned by HoldCo and 10% owned by KeyPerson1.
CoB could be 90% owned by HoldCo and 10% owned by KeyPerson2.
Selling part of the business
If you have two trades within one company, it can be very tricky to sell off part of the business. If these are separated into their own companies, then the process will be much simpler. Or it could be that you have one business that carries on the trade and another that holds assets that the buyer doesn’t want, but you do. You can keep the parts you want and sell the rest with relative ease.
If you do sell the company, you may be able to apply Substantial Shareholder Exemption (SSE), meaning that you pay no tax on the sale. This is where the subsidiary is a trading company (i.e., not just holding assets) and has held at least 10% of the share capital for 12 consecutive months in the last six years.
Remember, though, that the HoldCo owns the shares, not you personally. So, tax-free money from the sale is within your HoldCo. Getting at it personally can be expensive. You will need to look at drawing strategies that may include dividends. If your goal is to sell a subsidiary and pocket the cash personally, then a group structure may make this more complicated and expensive.
However, if you plan to reinvest these funds elsewhere in the group, that can be great, as you never paid tax on the sale!
Other potential tax considerations
Tax planning can be simplified now that you can concentrate on the dividends you declare from just one company, HoldCo. This is because all dividends from the subsidiaries are now paid up to HoldCo rather than you individually, as you no longer own the shares. These dividends are paid between the companies tax-free, but you will have tax to pay personally when drawing from HoldCo.
It does mean, though, that you can shift excess profit from subsidiaries up to HoldCo to ring-fence excess cash without any tax implications until you draw that money personally.
If any of the group companies are loss-making, then there is likely the opportunity to offset this loss against the profit from the other companies and, therefore, get access to that Corporation Tax relief straight away—otherwise, you would usually carry it forward to future years until that company becomes profitable.
You can transfer properties between group companies without attracting Stamp Duty. It is very beneficial for moving properties around compared to if the companies were not within a group.
The costs
As with everything, there is a cost to creating and maintaining a group structure.
It adds a layer of complexity to your admin and accounts. Each separate company will need a bank account, its own bookkeeping and accounts, and its own tax returns.
You will incur higher fees for accountancy and potentially software subscriptions (multiple Xero subs, for example).
There is a one-off cost to put the structure in place - anywhere from £3k to £10k.
Speaking from personal experience, having multiple businesses, each with its own bank account can add an extra layer of complication to spending money. Make sure you are using the right company card, for example.
Inevitably, there will be some element of shared costs between the companies so you will need to manage and reconcile intra-billing accounts regularly, too.
Despite these extra time and money costs, for businesses of a certain size, these are worth taking on to unlock the benefits we covered above.
As with most things in the accounting and tax world, there is no straightforward answer as to what route is best. It depends on your own circumstances and plans for each of the businesses moving forward and you personally. This is a complex area of tax that needs to consider a whole range of different tax schemes and allowances. This post is just here to show you some of the basic concepts and high-level views of what a group structure could look like.
About the author
Luke Desmond
Fractional CFO for Tech, eCommerce & SaaS. CEO @Crisp_Acc provides virtual finance functions. Co-Founder @getvaulta SaaS Startup for accountants.