This one usually arrives second hand. Somebody at a property meet-up mentioned their holdco, or it came up in a forum, and now you are wondering whether you have missed something your own accountant has never brought up.
Often you have. But not always, and the difference matters, because setting one up is not free.
What a holding company actually is
It is a company that owns other companies. Your property companies sit underneath it, and you own the holding company rather than owning each property company directly.
Nothing about the properties changes. The tenants do not know. The mortgages are unaffected. What changes is where the profit can go.
The one thing it is really for
Say you have profit in Company A and you want to buy another property.
Without a holding company, you take that profit out personally, pay income tax on it, and put what is left into Company B as a deposit. The money leaves the group, gets taxed on the way out, and a smaller amount arrives.
With a holding company, profit can move up from Company A to the holding company and back down into Company B. It never leaves the group, so it is not taxed as your personal income on the way.
With the right structure, funding the same purchase can need up to 38% less cash than the first route. That figure depends on your rate of tax and how your companies are set up today, so treat it as an illustration of what structure can be worth rather than a promise.
The other reasons people set one up
- Separation. If one company gets into difficulty, the others are not automatically dragged in with it.
- A trading business alongside the property. Many landlords run something else. A group can let the two sit sensibly together instead of being unrelated.
- Selling one part later. Selling a company from inside a group is a different, and often cleaner, exercise than selling a property out of a company.
- Succession. Shares in one holding company are easier to pass on gradually than shares in six separate ones.
When it is not worth it
This is the part that is usually missing from the conversation at the property meet-up.
A holding company costs money to set up and brings another set of accounts and returns to file every year, forever. Against that, the saving only materialises when you actually move profit between companies.
So it tends not to be worth it if:
- You have one property company and no plans for another.
- You take all the profit out to live on, so it was always going to be taxed personally anyway.
- You are not buying again, or not for a long time.
- You are close to selling up.
And it tends to be worth it if you are actively buying, reinvesting rather than drawing, and expect to hold for years.
The question is not "is a holding company good?" It is "will the tax saved across my next two or three purchases be more than the cost of putting it in place and running it?"
Doing the sum
Work out roughly what you intend to buy over the next three to five years, and how much of that will be funded from profit already sitting in a company. Apply your personal tax rate to that profit. That is broadly what the structure would save you.
Then weigh it against the setup cost plus the extra annual filing cost, multiplied by the years.
If the first number is comfortably bigger, it is probably worth doing, and it is far easier to put in place before you buy than to restructure around afterwards. If the numbers are close, the honest answer is usually to leave it alone and revisit when the plans firm up.
There are also ways of getting existing companies under a holding company that have different tax consequences depending on how it is done, which is exactly the sort of thing worth checking before anyone files anything.
If you want that sum done against your own figures, that is what the first call is for, and if the answer is no, we will tell you.