Protecting cash in a holding company

Each dividend up should be supported by accounts showing enough distributable profits, either the last annual accounts or interim accounts, a cash forecast showing the trading company can still pay its debts and fund the trade, a board minute recording the decision and the reasons, and a dividend voucher. The dividend is normally exempt from corporation tax for the holding company, but the protection it gives depends on it being lawful, so the paperwork matters.

It can help a great deal. Once cash has been lawfully paid up as a dividend, it belongs to the holding company, a separate legal person, so the trading company's creditors generally cannot reach it. The protection is weaker if the holding company has guaranteed the trading company's borrowing or leases, if the dividend was unlawful, or if it was paid when the trading company was already in financial difficulty, because a liquidator can challenge some earlier transactions.

There is no fixed rule. Many groups review the position at each year end, or quarterly, and move up whatever the trading company doesn't need for working capital, tax, planned investment and a sensible buffer. Regular, documented dividends keep the trading company's balance sheet lean and build the holding company's reserves. Each dividend still needs distributable profits and a proper board decision in the paying company.

Directors must act in the company's interests, and when a company is insolvent or close to it they must give weight to its creditors' interests. A dividend paid from proper distributable profits while the trading company is healthy and can meet its debts is normal group housekeeping. Problems arise when cash is stripped out while the company is struggling, or without checking that the accounts support the dividend. Minuting the reasons and the cash forecast is good practice.

It can. For Business Asset Disposal Relief your holding company must head a trading group, and the group is judged as a whole. HMRC's guidance treats more than 20% non-trading activity as substantial, looking at indicators such as assets, income, expenses and management time. Cash moved up from a trading subsidiary is still in the group, so a large, long-held surplus can count against trading status, even though it sits in the holding company rather than the trade.

It can, though the test is applied to the company being sold. The substantial shareholding exemption needs the subsidiary sold, with any companies below it, to be a trading company or the head of a trading group throughout the qualifying period. Surplus cash or investments built up inside the subsidiary being sold are what matter most. Cash held in the holding company itself no longer affects SSE, because the condition about the selling company trading was removed in 2017.

It can be. Business Relief excludes the value of excepted assets, which are assets not used wholly or mainly for the business in the last two years and not required for future use. Use by another group company counts as business use. Cash earmarked for a planned purchase or genuine working capital needs is usually fine; a large surplus with no business purpose is likely to be excepted, so that part of your shares' value gets no relief.

HMRC's Capital Gains Manual treats non-trading activity above 20% as substantial. It looks at several indicators, including the share of the group's assets and income that are non-trading, and the expenses and time spent on non-trading work. These are indicators, not strict percentage tests, and HMRC weighs them together. Cash kept to meet the trade's needs is part of the trade; long-term retention of surplus profits may be an investment activity.

Each route has trade-offs. Investing in the holding company is simple but puts the investments next to the shares in your trading subsidiaries. A subsidiary investment company ring-fences the investments and keeps records clean, but it is still part of the group for the trading-group tests. A sister company owned directly by you sits outside the group, but cash usually has to pass through your hands as a taxed dividend to get there, unless the group is later demerged.

Usually, yes. A close company that does not exist wholly or mainly for permitted purposes, such as trading, commercial letting to unconnected tenants or holding shares in trading companies, is a close investment-holding company under section 18N of the Corporation Tax Act 2010. An investment subsidiary holding shares, funds or bonds normally falls into that category, so it pays the 25% main rate on all its profits, with no small profits rate or marginal relief.

Not just because it keeps some cash. A holding company whose main purpose is holding shares in trading subsidiaries, coordinating them or lending to them exists for permitted purposes, so it is not a close investment-holding company. The risk grows if, over time, the holding company's main activity becomes managing a large portfolio of investments, so that investing outweighs its role as the parent of a trading group.

Yes, and many groups do. The holding company can lend money back to the trading company for working capital, equipment or an acquisition, ideally under a written loan agreement. If the loan is secured by a properly registered charge, the holding company can rank as a secured creditor if the trade ever fails, rather than as an unsecured one. Interest, if charged, is taxable in the holding company and usually deductible in the trading company.

It can be part of the answer. An employer pension contribution is usually deductible for the company, is not taxed on you as income and moves money outside the business altogether. But it is limited by your annual allowance, normally £60,000, and the money is locked away until pension age. From April 2027 most unused pension funds come into your estate for inheritance tax. Many owners use both: pensions up to the allowance, the holding company for the rest.

Yes, and this is one of the main reasons to build it up. A holding company with cash can buy the shares of another company, or start a new subsidiary, without the money first being paid out to you as a taxed dividend. Buying or starting another trading business also tends to support trading-group status, because the cash is put to work in trading activities rather than sitting as an investment.

There is no statutory figure. The trading company should keep enough to pay its creditors, wages, VAT and corporation tax, fund planned capital spending and survive a reasonable downturn, based on a realistic cash forecast. Anything above that is surplus that can be moved up. Your accountant or finance team will usually know the business's seasonal swings, and a documented forecast also supports the directors' decision to pay the dividend.

Earmarking helps, but only if it is genuine. HMRC looks at whether funds are held to meet the trade's cash-flow needs, whether they are earmarked for trade purposes, the nature of any investments and how actively they are managed. Board minutes and plans showing cash set aside for, say, new premises, an acquisition or a major contract are useful evidence. A vague intention to use the money someday is unlikely to persuade HMRC.

Usually not. A passive holding company, which is ignored when counting associated companies, must have no assets other than shares in its subsidiaries and no income other than dividends, which it pays on to shareholders. Holding cash, investments or earning interest breaks those conditions. Once the holding company counts as associated, each company's 19% and 25% corporation tax limits are divided by the number of companies in the group.

If you sell the holding company shares, the cash is part of what the buyer pays for, and buyers often prefer not to pay full value for surplus cash. A large cash pile can also put Business Asset Disposal Relief at risk on the sale. Owners often plan ahead: use the cash for pensions, pay it out over several years at lower dividend rates, or separate it into a different company before a sale, which needs careful timing and advice.

Not necessarily. A sister investment company is any company, owned by the same shareholders, that holds investments outside the trading group. A family investment company is a particular design, usually with different share classes so parents keep control while children own the growth, aimed at passing wealth on. A sister company can be set up as a family investment company, but it doesn't have to be, and the tax issues overlap only partly.