Setting up a holding company
Do I need a holding company? The honest pros and cons
A holding company is not right for everyone. Who benefits, who doesn't, what it costs in corporation tax, and a checklist to decide, with a worked example.
Reviewed by Omar Aswat CTA ·
You need a holding company only if it solves a problem you actually have: usually surplus cash you want to protect, property you want to keep apart, a second business, or a sale or succession on the horizon. If you take out all the profit every year and plan to keep one business, a single company is usually simpler and cheaper.
A holding company (HoldCo) is a company that owns the shares in your trading company (TradeCo). Plenty of owners set one up because someone told them they should. This article gives you the honest case for and against, so you can decide.
What a holding company does
In the usual set-up you own HoldCo and HoldCo owns 100% of TradeCo. The business carries on as before. What changes is where profit can go. A dividend from TradeCo to HoldCo is normally exempt from corporation tax under Part 9A of the Corporation Tax Act 2009, so surplus profit can move up the group without a further layer of tax. It is taxed on you only when HoldCo pays it to you. See holding company tax advice for the full picture.
The case for
- Protect cash. Cash lawfully paid up to HoldCo is out of reach of TradeCo's creditors, subject to the limits on that protection.
- Separate property. The premises can sit in their own company, kept apart from trading risk.
- Add a venture. A second business can have its own subsidiary, with group relief able to share losses within a 75% group.
- Sell a subsidiary. HoldCo's gain on selling a qualifying trading subsidiary can be exempt under the substantial shareholding exemption.
- Succession. Shares in a trading group can qualify for Business Relief for inheritance tax, and can be passed on gradually.
The case against
- Associated companies. HoldCo is usually associated with TradeCo, so the corporation tax limits are each divided by two. The main exception is a purely passive holding company: one that has no trade, holds only shares in 51% subsidiaries, receives only dividends and passes them on, and has no management expenses.
- No personal tax saving on its own. Extraction is still taxed at dividend rates.
- Reliefs need watching. Large cash or investment balances can threaten trading status for Business Asset Disposal Relief, the substantial shareholding exemption and Business Relief.
- More to run. Another company means another set of accounts and returns.
- Timing risk. Inserting a holding company just before a sale needs care. Since 26 November 2025, share exchange relief is denied where the arrangements have a main purpose of avoiding capital gains tax or corporation tax.
A worked example
This is an illustration, not a client example. TradeCo makes taxable profit of £150,000 a year. You need £60,000 a year to live on. Everything else is surplus.
| Single company | With HoldCo | |
|---|---|---|
| Corporation tax limits | £50,000 / £250,000 | £25,000 / £125,000 |
| 25% of £150,000 | £37,500 | £37,500 |
| Marginal relief: 3/200 x (upper limit - £150,000) | £1,500 | £0 |
| Corporation tax | £36,000 | £37,500 |
| Profit after tax | £114,000 | £112,500 |
| Paid out to you | £60,000 | £60,000 |
| Surplus left | £54,000, in TradeCo | £52,500, in HoldCo |
The holding company costs £1,500 a year here. In return, the surplus is in a different company from the trade, and it can be invested, lent back on proper terms, or kept for a future purchase without being exposed to TradeCo's liabilities. Whether that is worth £1,500 a year is your call, and it is why we start with the numbers. Try them in the holding company calculator, and see associated companies for how the limits work.
Who benefits most
A holding company tends to pay off if you:
- leave a meaningful share of profit in the company year after year;
- own, or plan to own, property the business uses;
- want to start or buy another business without risking the first;
- expect to sell part of the business, or pass it to children, in the next few years;
- have co-owners who want to hold their interest in different ways.
Who probably doesn't
- You take out all of the profit, or most of it, each year.
- You run a single small company with no plans to expand or sell.
- Profit is below about £25,000 and the company is not going to grow.
- A sale is already being negotiated, and the restructuring would be seen as part of the sale.
A decision checklist
Answer these honestly.
- Does the company hold cash you don't need personally in the next three years?
- Is there a risk (staff, clients, regulation, contracts) that a creditor could claim against that cash?
- Do you own, or plan to own, property the business uses?
- Might you start or buy a second business?
- Could you sell all or part of the business in the next five years?
- Is passing on shares to the next generation a goal?
- Can you live with up to £1,875 a year of extra corporation tax in the middle profit range, and one more set of accounts?
If you answered yes to two or more of questions 1 to 6, a holding company is worth a proper look. If you answered no to all of them, you likely don't need one yet. Read inserting a holding company to see what is involved, and how long an insertion takes.
What to consider instead
A holding company is not the only way to deal with surplus cash. Depending on your goals, you might:
- Take more out as dividends each year, using the lower dividend bands in each tax year, which do not carry forward.
- Pay employer pension contributions, which are generally deductible where paid wholly and exclusively for the business, and count towards your annual allowance, normally £60,000.
- Spend it in the trade, through equipment, people or premises, which also keeps the company looking like a trading company.
- Set up a separate company later, once the need is clear, for property or a new venture.
None of these is wrong. They simply don't give you a second company to hold cash and shares. The reasons above are what justify one.
Talk to us
If you aren't sure, book a call. We'll give you an honest view, including when the answer is "not yet". We respond the same working day.
This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.
