Running a group
Moving cash from a trading company to a holding company: how, why and what can go wrong
How a trading company pays surplus cash up to a holding company as an exempt dividend: reserves, paperwork, trading status, insolvency risk and pre-sale cautions.
Reviewed by Omar Aswat CTA ·
A trading company pays surplus cash up to its holding company as a dividend. Provided the trading company has enough distributable reserves and can still pay its debts, that dividend is normally exempt from corporation tax, and the cash moves out of reach of the trade's creditors without a tax cost.
That is the single most common reason owners set up a holding company. This article explains how the move works, what you need on paper, and the situations where it can go wrong.
Why move cash up
A trading company is exposed to whatever the trade is exposed to: a bad debt, a dispute, a claim, a failed contract. Cash sitting there is available to its creditors. Once cash has been lawfully paid up to a holding company (HoldCo), it belongs to a separate legal person.
There are other reasons:
- Keeping the trade looking like a trade. Large idle balances can raise questions about trading status. See how much cash is too much.
- Reinvesting without personal tax. HoldCo can invest, lend or buy another business, and you pay dividend tax only when HoldCo pays you.
- A cleaner sale. A buyer of the trading company doesn't take cash the owner wants to keep, subject to the deal terms.
For the broader case, see protecting cash in a holding company.
How it works, step by step
- Check reserves. The trading company (TradeCo) can only pay a dividend from its accumulated realised profits (section 830 of the Companies Act 2006), supported by its last annual accounts or interim accounts.
- Check cash and debts. Work out what TradeCo needs for wages, VAT, corporation tax, suppliers, planned spending and a downturn, based on a realistic forecast. Only the surplus should move.
- Directors decide. TradeCo's board resolves to pay an interim dividend, recording the figures it considered.
- Pay it. Transfer the cash to HoldCo's bank account on the date of the dividend.
- Voucher and records. Issue a dividend voucher, and record the dividend in both companies' books.
- HoldCo decides what next. Keep it, invest it, lend it back, or pay a dividend on to you.
A dividend from a UK company the recipient controls is exempt from corporation tax under Part 9A of the Corporation Tax Act 2009. It is also left out of HoldCo's augmented profits, so it doesn't change HoldCo's corporation tax rate band.
A worked example
This is an illustration, not a client example. TradeCo has retained profits of £600,000 from earlier years and £700,000 in the bank. A cash flow forecast shows it needs £250,000 for working capital and planned equipment, plus a £50,000 buffer.
| Amount | |
|---|---|
| Cash in TradeCo | £700,000 |
| Kept for working capital and equipment | (£250,000) |
| Buffer for a downturn | (£50,000) |
| Surplus cash | £400,000 |
| Distributable reserves | £600,000 |
| Dividend to HoldCo | £400,000 |
The £400,000 is within both the cash surplus and the reserves. No corporation tax arises on the dividend in HoldCo, and you pay nothing personally. HoldCo now has £400,000 it can use freely, and TradeCo has reserves of £200,000 left.
If TradeCo had paid the same £400,000 to you personally instead, it would have been taxed on you as a dividend at up to 39.35% in 2026/27.
The paperwork
For each dividend up, keep:
- Board minutes of TradeCo recording the reserves, the cash position and the decision;
- A dividend voucher showing the company, date, amount, shareholder (HoldCo) and share class;
- Accounts or workings showing the distributable reserves at the date;
- A bank record showing the cash actually moved.
For a bigger or unusual dividend, up-to-date management accounts help. See dividends from previous years' profits for how reserves are judged.
When it can go wrong
Reserves are too low. Paying more than the distributable reserves is an unlawful dividend. Under section 847 of the Companies Act 2006, a shareholder who knew, or had reasonable grounds to believe, that it was unlawful must repay it.
TradeCo is insolvent or close to it. Directors must act in the company's interests, and when it is insolvent or heading that way they must give weight to creditors' interests. Cash stripped out of a struggling company can be challenged, and a liquidator can look at earlier transactions. Healthy-company dividends from genuine surplus are very different.
HoldCo has guaranteed TradeCo's debts. If HoldCo has given a guarantee over TradeCo's bank loan or lease, its cash is exposed again. Check guarantees and bank covenants first, as some lenders restrict dividends.
The dividend is not actually paid. A declared dividend left on the intercompany account is a debt HoldCo owes TradeCo. The cash hasn't moved and isn't protected.
Trading status. Moving cash up protects it, but surplus cash in HoldCo is still in the group for Business Asset Disposal Relief and Business Relief. Review the balance regularly.
A sale is on the horizon. A routine dividend up to HoldCo is not the issue. The risk is a pre-sale series of steps, for example inserting a holding company, paying cash up and then out to shareholders, where HMRC may consider the transactions in securities rules in Part 13 of the Income Tax Act 2007. Those rules can apply where a main purpose is to obtain an income tax advantage. It is worth checking the plan before you act, and clearance can be sought. See pre-sale restructuring.
Lending it back
Moving cash up does not mean TradeCo can never use it again. HoldCo can lend money back for working capital, equipment or an acquisition. Put a written loan agreement in place, decide whether interest is charged, and consider a registered charge so HoldCo ranks as a secured creditor if the trade ever fails. Interest is taxable in HoldCo and is usually deductible in TradeCo, subject to the normal rules. Keep the loan separate from the dividend, so each can be explained on its own.
How often to do it
There is no required frequency. Some groups pay up once a year after the accounts are finalised, which gives clear reserves figures. Others pay quarterly, or when cash passes a set level. Whichever you choose, document the decision each time, and review the cash forecast before each payment rather than paying a fixed amount automatically.
Talk to us
If you want to move cash up in a way that holds up under scrutiny, book a call. 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.
