Today, I’m going to show you why I use a property holding company structure – If you own multiple businesses and have profits that you move into investments in other companies, you could be making a huge tax mistake and putting your businesses at risk by not using a holding company structure.
Without it, you might be paying lots in dividend tax by passing money through yourself personally OR even worse, loaning money between company A, to company B which puts both businesses at risk.
I’m going to simply break down why a holding company structure is a smart way to manage your businesses and why it makes sense when you have multiple businesses.
A hold co is an incredibly efficient way to manage cash amongst your business, you can move profits from one company up, tax free and leave it protected in your holding company until you’re either ready to draw it as dividends personally or safely loan it into an asset or property company.
First thing’s first – I’m not an accountant and I don’t know it all. So I strongly suggest speaking to a real accountant about your own tax and business situation as anything I say in this video could technically be wrong, rules might change in the future etc… so just be smart about it.
First we’re going to explore the different ways of moving profits from company A into your company to purchase assets like property
- Up and down – Dividends & Tax – If you’re a higher rate tax payer, it means that when your company makes profit and you pay yourself via dividends you’ll lose about 50% of that income through tax, national insurance, student loan. Imagine making £20,000 profit in a business, then only seeing £10k of that to then loan into your other company.
- Side to Side – Risk – You could loan retained profits and spare cash from one company to another, but this will open both companies up to a lot of risk. Especially when it comes to investing where risk is involved. For example, if one company defaulted and the creditors swooped in, legally they can go after the original company to recoup any costs because of that loan you generated between the two companies that you own. So even though you might not realise it, you’re putting all your businesses at risk by doing it this way.
- Owning companies with other people – Lets say you owned a company with other people, you’re already a higher rate tax payer and they want to start drawing dividends from the company to pay themselves… all the shareholders of the company have to take those dividends at the same time… but what if you don’t want to because you’ll instantly lose half of it, it’s a waste of money for you right.
So now we’ve explored the problems of owning multiple companies and moving profits between them… the big question is, what’s the most efficient way of doing it? Lets cover the same topics, but with a hold co structure
A holding company, is a limited company that you own 100% in your own personal name, but then your holding company owns all the shares of all the companies beneath it, these are known as subsidiaries. Lots of companies that you know use this structure because when you have multiple businesses, it just makes sense.
How a holding company can work well with property investing
- Up and down – Dividends & tax – So this time, when company A has paid it’s corporation tax you’re left with what’s known as retained profits, these can be moved up into a holding company completely tax free via dividends. When you move dividends between ltd company to ltd company they’re tax free.
This means that money goes up tax free and then you can loan money back down into your property or investing company and retain the full amount because it doesn’t touch you directly – and remember, because it’s a loan – company B must repay all that loan back tax free. If you want to get even more complex – you can also add interest to that loan. In this scenario – it works great.
- Side to side – Risk – So we know that you shouldn’t really loan money sideways from limited company to limited company because it’ll open up risk in case one of them defaults, however – by moving the dividends up into a holding company first, then loaning it from the holding company. Legally this means that your subsidiaries are protected and that if one company defaulted and liquidated, creditors can’t come after any others, nor can they come after the holding company. Protecting the rest of your business structure.
- Owning companies with other people – If you own a company with other people, it also works incredibly well here as well. Lets say you was 50/50 in a business, instead of you owning that 50%, your holding company owns 50% meaning when the other partner in the business wants to take dividends to pay themselves, you can roll up your share of the dividend tax free into your holding company and either draw it as a dividend / salary when you want in the future, you could even do this over many years to retain as much cash as possible or you can then loan that money back down into your property or asset company to grow it further.
- Succession planning / generational wealth – Lastly, holding companies are great in retaining wealth when you think about succession planning and generational wealth. It means that your kids can one day take over the holding company, and when you pass away it means you have a tax efficient way of retaining the cash as it sits in the holding company, rather than the directors name.
Cons of a holding company structure I’m not knowledgeable enough to know the true cons of a holding company structure, your accountant should be able to do that. Mainly for me, it’s more expensive so it means setting up multiple companies, paying multiple bank account fees, multiple account software fees, more accountancy fees but in the long run it has to be worth it.