What are the benefits of a family holding company?

Family businesses account for the majority of companies worldwide, from micro-operations to international players. Throughout their lifecycle, these companies evolve, along with their operational structures, goals and needs. One way to manage the expanding needs of the business while maintaining control in the family is with a family holding company.

Kapil Davda explains how a family holding can provide long term security and flexibility for family businesses while also protecting key assets.

What is a family holding company?

A family holding company is a private company that is controlled and run by directors within a particular family. In this arrangement shares are distributed among other relatives, often children, but with decision-making power vested in the directors.

Family holding companies create structures that separate assets, control and management in a business. These can be extremely useful as a family business grows, adding new team members from within and outside the family, accruing assets and generating new commercial entities. The holding company serves as a controlling layer above the elements of the business, balancing the flexibility to move and manage assets while concentrating control within the family.

What are the benefits of a family holding company?

Family holding companies are not just for high-net worth families and international giants - any business with assets and revenue worth protecting and managing can benefit from the structure and the advantages it brings. This includes:

Asset protection

As trading companies grow, they acquire assets such as premises, intellectual property, equipment or copyrights. If this business operates in a high-risk sector or a particularly volatile market, these assets could come under threat in the event of legal or financial difficulties.

One way to protect such assets is to move them to a separate entity from the trading company - and a family holding company is a popular option. Say, for example, that a company owns several properties – the company can transfer these to a holding company without adverse tax effects, subject to relevant conditions.

In the event that the trading company enters difficulties, these properties would not be considered among its relevant assets.

Wealth Management

As a family business accrues success and revenue, the long term planner will have to think about how to keep that wealth in the family. Passing on high-value assets or wealth directly leaves the recipient liable for Inheritance Tax (IHT), the standard rate for which is 40% once over the allowable threshold.

A family holding company can hold the assets to be passed on, with the next generation instead of receiving controlling shares in the company. These are eligible for business property relief, reducing IHT by 50% on:

• shares controlling more than 50% of the voting rights in a listed company

• land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled

• land, buildings or machinery used in the business and held in a trust that it has the right to benefit from

This relief can be extremely valuable for high-worth assets.

Tax planning

Moving assets and income from a personal consideration to a family holding company can give business owners more flexibility in their tax affairs.

Companies pay Corporation Tax rates of 19% (25% from April 2023) while the top rate for personal income tax is 45%. In addition, no Corporation Tax will be payable on dividends between entities in the company, unlike if they had been paid to the owner.

In addition, trading expenses incurred by the companies in a group structure can potentially be shared and offset against the total trading profits of the group, giving rise to tax efficiencies.

When should I think about creating a family holding company?

Family holding companies come in handy in a range of scenarios, but they are most useful when there are valuable assets to be protected, managed or moved, including potentially the business itself. Common instances include:

• When you want to retain control of businesses but want to get family involved in the day to day running.

• Incentivising family members by setting up appropriate reward structures, matched to individual effort.

• Succession planning for the long-term survival of the business.

• Protecting key assets within the family.

Setting up a family holding company

Creating a family holding company adds an extra layer of bureaucracy to the management of your business, requiring attention and processes just like any other company. This includes compliance and board management.

However, setting up a family holding company is relatively straightforward and inexpensive, especially in comparison with the potential savings they can deliver, which can be realised swiftly after creation.

When creating a company for this purpose, it’s important to work with an experienced advisor, particularly regarding the tax planning. Tax legislation changes regularly and arrangements that were once advantageous may need revising in future.

At Haines Watts High Wycombe, we take a long-term view of your success, building strategies around your unique goals and needs. We can advise you on the right time to restructure, the best way to manage your assets and secure the wellbeing of generations to come.

Get in touch with us to find out how you can secure the future of your business and your family with complete peace of mind.