What is a holding company?

A holding company, sometimes known as a parent company, is a very specific type of business that usually conducts no activity other than owning (‘holding’) shares in other companies, managing other businesses, and receiving dividends from subsidiaries.

Section 1159 of the Companies Act 2006 states that a company is the “subsidiary” of another company, its “holding company”, if that other company:

1. holds a majority of the voting rights in it, or
2. is a member of it and has the right to appoint or remove a majority of its board of directors, or
3. is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company

The structure and purpose of holding companies vary. Some are simply private investors who hold shares in a subsidiary and receive dividends. They play no part in the management of the subsidiary or its activities. Other holding companies have voting rights in their subsidiaries and have an active role in the running and management of these businesses.

Tax liabilities of a holding company

The majority of dividends that a holding company receives from any UK subsidiaries should be exempt from tax. This is one of the major attractions.

Additionally, provided that the parent company holds at least 10% of the ordinary shares in a subsidiary for a continuous period of 12 months before and after any share disposal, it can dispose of its shareholdings in an active subsidiary without being liable to Capital Gains Tax.

• How to set up a holding company

HMRC states that holding companies are not liable for VAT if their basic functions are to:

• acquire shares in subsidiaries
• receive dividends arising from the shareholdings
• defend itself and its subsidiaries from takeovers
• dispose of shares in subsidiaries

These activities are not considered ‘taxable supplies’, so they do not attract VAT charges. Furthermore, holding companies are not permitted to register for VAT if these are the only activities they carry out.

Holding companies that provide or intend to provide taxable supplies to a subsidiary, such as management services, are permitted to register for VAT and must do so if their annual taxable supplies exceed £90,000 (the VAT registration threshold).

Holding company name rules

There are no longer any restrictions on using the word ‘holding’ or ‘holdings’ in a company name, so you are free to register the name without prior approval from the Secretary of State at Companies House.