A holding company is a type of business that deals specifically with assets, investments, and management, rather than providing goods and services with a view to making a profit from production and sales.
It will usually be limited by shares, and its main activities will involve owning assets in another company or many companies. Assets could be in the form of shares, intellectual property, and real property.
Holding companies may also be responsible for the supervision and management of other companies, in addition to, or instead of, holding shares and receiving dividends from their shareholdings. Aside from these functions, a holding company will not normally itself trade or conduct any other type of business activity.
The other companies in which assets are held are known as ‘subsidiaries’. Holding companies in the UK which own more than 50% of another company’s shares are known as ‘parent’ companies of these subsidiaries.
The legal requirements of a holding company
According to the Companies Act 2006 (sec. 1159), a holding company is considered to be a ‘parent’ of a subsidiary when:
- The parent company holds greater than 50% of the voting rights in the subsidiary
- The parent company is a member of the subsidiary and has the right to appoint or remove a majority of its board of directors
- The parent company is a member of the subsidiary and, in accordance with an agreement with other shareholders, it alone controls a majority of the voting rights in the subsidiary
Tax liabilities of a holding company
One of the foremost attractions of this type of company is the potential for tax savings. Most share disposals and dividend payments are exempt from tax.
If a holding company owns a ‘substantial shareholding’ of at least 10% of the ordinary shares in a subsidiary for a period of 12 consecutive months during a two-year period preceding the disposal, it can dispose of these shares while being exempt from capital gains. This is known as the Substantial Shareholder Exemption. This is on the proviso that both the holding company and its subsidiary are active businesses for a 12-month period before and after the disposal.
A holding company will also be exempt from VAT taxable supplies if its basic functions are:
- The acquisition of shares in subsidiaries
- Receiving dividend payments from these shareholdings
- Defending itself and its subsidiaries from takeovers
- Disposing of shareholdings in subsidiaries
HMRC does not view these functions as ‘taxable supplies’. Therefore, any holding company that operates with these basic functions alone will not be liable for VAT. It is not possible for this type of holding company to voluntarily register for VAT.
If the holding company provides or intends to provide, taxable supplies to a subsidiary (for example, supervision and management services), it will be permitted to voluntarily register for VAT. Compulsory VAT registration will apply if the annual taxable income of the holding company exceeds £85,000 (2022/23 tax year).
Can I use the word ‘holding’ in a company name?
Changes were made on 31st January 2015 to the rules for company and business names. The use of the word ‘holding’ (or ‘holdings’) is no longer considered ‘sensitive’. You can now include this word in your company name without seeking permission from Companies House.
How do I register a holding company?
A holding company can be set up in exactly the same way as any other private company limited by shares. It must be legally incorporated at Companies House and adhere to strict statutory filing requirements.
1st Formations offers a range of online formation packages for registering a company limited by shares in just 3 working hours. The following information will be required on the application form:
- Company name
- Registered office address
- Standard Industrial Classification (SIC) codes
- Directors’ details (minimum of one)
- Shareholders’ details (minimum of one)
- Share capital – details of the shares issued to shareholders
- Information about people with significant control
Your application form will be submitted electronically to Companies House. Provided everything is in order, your new company will be registered within three working hours and we will send you a confirmation email with digital copies of your incorporation documents. Hardcopy documents (if applicable) will be posted to your registered office within 24 hours of incorporation.
You can use our Online Company Manager to monitor the progress of your application once it has been submitted to Companies House. After incorporation, this facility can be used to manage and update your company details online, file and update annual confirmation statements (previously the annual return) and report changes to Companies House.