A holding company: Worth a thought?

Ken Moody explains why a holding company can sometimes be useful.

Corporate structures are often more complex than they need be, which may therefore involve additional administrative and accounting costs, which could be avoided. 

However, there are potential advantages for the owner-managers of a successful trading company in interposing a holding company on top. 

The first point is a commercial one. If the trading company (‘Tradeco’) has surplus funds or valuable assets, these could be transferred to a holding company (‘Holdco’) in order to protect those assets from creditors of Tradeco in the event that Tradeco becomes insolvent.

There are also technical tax reasons why the strategy may be advantageous.

The substantial shareholdings exemption (SSE) applies when a company disposes of an investment in shares of another company in which it holds (broadly) at least 10% of the equity. The SSE exempts any gain (or loss) arising on the disposal provided that the shares have been held for at least a 12-month period. Usually, this will be the 12 months ending with the date of disposal.

Suppose a competitor wishes to expand its business and is keen to acquire the trade or perhaps part of the trade of Tradeco. It will often happen, however, that a buyer will not wish to acquire an existing company with a track record. Or it may be that the buyer does not wish to acquire property which is in Tradeco. 

The solution in these situations may be the ‘hive down’ of the trade or part of a trade to a new subsidiary company (‘Newco’), which is then sold to the buyer. 

The problem with these scenarios as far as the SSE is concerned is that the shares in Newco will not have been owned for the minimum 12-month period. 

The period for which the shares in Newco have been held may be deemed to be extended where ‘an asset’ used in the trade of Newco had been transferred by another group company which used the asset in its trade. In that case, the period for which the shares in Newco have been held is extended by the time during which the transferor had used the asset.

A small group has existed for some years and consists of Holdco and Tradeco, a single trading subsidiary. An offer has been received for the trading activity, but the buyer does not wish to acquire Tradeco itself. 

It is agreed, therefore, that the trade of Tradeco will be hived down to a new subsidiary (Newco), which will then be sold to the buyer. The shares in Newco will have been owned only for a short period before the sale, but the period of ownership is extended by reference to the use of the assets (e.g. plant and machinery, pre-2002 goodwill) transferred by Tradeco. 

As Tradeco has traded for several years, the substantial shareholding requirement is, therefore, met. 

However, HMRC insist that a group must have existed for at least 12 months, because the previous use of the asset must have occurred while Tradeco was a member of the group and, therefore, a group must have been in existence. The SSE would not apply if Tradeco is a singleton company which hives down its trade or part of its trade to Newco shortly before the sale of Newco, because while the assets transferred would have been used previously by Tradeco, this was not at a time when it was a group member (see HMRC’s Capital Gains manual at CG53080C). 

While HMRC’s interpretation at CG53080C is open to question, if Tradeco is a member of a group for at least 12 months before the sale of its trade or part of its trade via a hive-down and sale of Newco, SSE will be secured. Therefore, the interposition of Holdco may be advantageous both for commercial reasons, and also gives greater flexibility where the possibility exists of a future sale of part of the trading activity. Formation of a dormant subsidiary so as to create a CGT group might also work, but this is perhaps debatable.