The idea of setting up a holding company is increasingly popular, especially on social media, where unregulated advisers promote the structure as a silver bullet for tax efficiency.
But hidden tax traps lurk for those who cut corners.
Understanding the importance of HMRC clearance and professional advice can be the difference between a sound corporate structure and a costly tax bill.
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Why Holding Companies Are on the Rise
Business owners are often advised to establish holding companies to streamline group structures, protect assets, or facilitate future sales.
Holding companies can hold shares in subsidiary trading companies, providing an umbrella structure that can offer commercial and tax benefits.
One classic scenario involves a trading company that also owns a property you trade from.
To protect the property from the trading risks, advisers often suggest transferring it to a separate property company (“prop co”) under a holding company (“hold co”).
On the surface, this is a sound strategy.
However, a lack of proper planning can lead to unintended tax consequences, particularly regarding Capital Gains Tax (CGT) and the loss of key tax reliefs.
HMRC Clearance – Why It Matters
When setting up a holding company, especially through a share-for-share exchange or restructuring involving multiple companies, obtaining HMRC clearance is often advisable.
Clearance provides reassurance that anti-avoidance rules will not be applied to your transaction.
However, it’s vital to understand what clearance does – and doesn’t – cover:
- What Clearance Does: HMRC confirms they won’t apply certain anti-avoidance provisions (e.g., transactions in securities or share-for-share exchanges) to reclassify your transaction as income rather than capital.
- What Clearance Doesn’t Do: Clearance is not a “blessing” on the transaction. It doesn’t guarantee you’ll qualify for tax reliefs or that the transaction is free from other tax issues. Correct implementation is key.
Failure to get clearance can lead to CGT being triggered unexpectedly when restructuring, costing business owners tens or even hundreds of thousands of pounds.
The CGT Trap – Property Extraction Gone Wrong
Consider a trading company holding a commercial property.
To protect the property, you move it into a separate prop co under a hold co. So far, so good.
But here’s where it can go wrong:
- CGT on Transfers: Transferring the property from the trading company to the prop co triggers a CGT event. The property is treated as disposed of at market value, even if no money changes hands. Without HMRC clearance, this can result in an immediate tax bill.
- Loss of Business Asset Disposal Relief (BADR): Formerly Entrepreneurs’ Relief, BADR can reduce CGT to 10% when selling a trading company. If the property is hived off into a separate company and starts earning rent, that prop co is likely classified as an investment company, not a trading company. When you eventually sell the trading company, you may find that BADR is denied because the property was no longer part of the trading business.
- Inheritance Tax Risks: Receiving rent from the trading company turns the prop co into an investment company. This jeopardises Business Relief for Inheritance Tax (IHT), which normally reduces the value of trading company shares to zero for IHT purposes. If the prop co is deemed an investment company, this relief can be lost, significantly increasing the tax burden on death.
The Solution – Avoid the Rent Trap
A common mistake is charging rent from the trading company to the prop co – many non-qualified accountants advise to do this.
This transforms the prop co into an investment company, stripping away CGT and IHT reliefs.
Instead:
- Avoid charging rent between the trading company and the prop co.
- If the prop co needs funds (e.g., to cover mortgage repayments), dividends can be paid up to the hold co, which can then loan the funds to the prop co.
- Keep the structure clean and avoid transactions that could reclassify the company’s status.
Beware of Unregulated Advisers
The rise of social media “tax experts” promoting holding company structures is concerning.
Many are unregulated and lack the qualifications to advise on complex tax issues.
Worse still, they often fail to secure HMRC clearance or consider the impact of CGT, SDLT, and IHT.
Business owners have reported paying thousands for company setups that later proved tax-inefficient or exposed them to unexpected liabilities.
In one case, a firm charged £5,000 simply to incorporate a property company, with no clearance application or legal support, leaving the client exposed to CGT and SDLT.
How to Get It Right
When setting up a holding company structure:
- Use Regulated Professionals: Ensure your accountant or tax adviser is part of a professional body (e.g., ICAEW, ACCA, CIOT) and holds professional indemnity insurance.
- Seek HMRC Clearance: Especially when restructuring a group or inserting a holding company.
- Engage Legal Support: Corporate transactions must be implemented precisely. Poor documentation can invalidate tax reliefs.
- Understand the Rent Issue: Don’t undermine your structure by converting a trading business into an investment business unintentionally.
- Review Regularly: Business needs and tax laws evolve. Structures should be reviewed periodically to ensure they remain efficient and compliant.
Summary
Holding companies can be a highly effective tool in your tax planning arsenal, but only if done right.
Cutting corners or relying on unqualified advice can result in hefty tax bills and lost reliefs.
Proper planning, HMRC clearance, and expert guidance ensure that your structure not only works but also withstands HMRC scrutiny.
If you’re considering setting up a holding company or need a review of your existing structure, get in touch with Tax Expert today.
Fill out our form here for any questions, give us a call at 01772 788200, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel