TL;DR
In short
- A holding company owns shares in one or more property companies (SPVs).
- Dividends paid by a subsidiary to its parent are generally exempt from corporation tax, subject to conditions; tax arises when money is paid out to you personally.
- Group relief can let one group company’s loss reduce another group company’s taxable profit for the same period, subject to conditions.
- Separate companies can limit how far a problem in one affects the others, but personal guarantees can reduce that protection.
- Several companies mean more accounts and returns, and the corporation tax limits are shared between associated companies.
Investing in buy-to-let properties in the UK has entered a new phase. Section 24 restricts the tax relief that individual landlords get on mortgage interest and other finance costs, which is one reason some investors consider buying through a limited company. If you are thinking about building a portfolio, it is worth understanding how a holding company structure works.
Let’s explain it simply: a holding company is a parent company that owns shares in subsidiary companies (known as SPVs). How can this structure help investors?
1. Dividends within the group (the dividend exemption)
A dividend paid out of a company to you personally is taxed as your income, which is why some investors are wary of paying dividends. Within a group the position is different. In the UK tax system (Part 9A of the Corporation Tax Act 2009), a dividend that one of your companies (a subsidiary) pays to another (the parent) is generally exempt from corporation tax in the parent’s hands, provided it meets the exemption conditions.
The subsidiary still pays corporation tax on its own profits. Its post-tax profits can then be paid up to the holding company as a dividend, generally without a further corporation tax charge, and used, for example, towards the deposit for the next purchase. Tax on dividends arises when money is later paid out to you personally.
2. Group relief: using one company’s loss against another’s profit
Where your companies form a group for tax purposes (broadly, one company owns at least 75% of the other, or both are 75% subsidiaries of the same parent), a loss made by one company can, subject to conditions, be surrendered to a profitable fellow group company for the same accounting period.
For example, if SPV 1 makes a taxable profit of £20,000 and SPV 2 makes a revenue loss of £20,000 in the same period (for example, from deductible repairs and void periods), SPV 2 may be able to surrender that loss to SPV 1 and reduce SPV 1’s taxable profit. Each company still files its own Company Tax Return; there is no single group return. A UK property business loss can only be surrendered to the extent that it exceeds the surrendering company’s own profits for the period, and the cost of improving a property (for example, a full renovation) is usually capital expenditure that does not create a deductible loss.
If both properties were held in the same company, their rental profits and losses would normally be netted off within that company anyway, so group relief matters mainly when properties are held in separate companies.
3. Security and risk isolation
Holding each property in a separate company can also help to limit risk. Each company is legally separate, so a legal problem or tenant claim against one company does not normally affect the assets held by the other companies. This protection has limits: for example, if you have given a personal guarantee for a company’s mortgage, you can be personally liable under it.
4. Things to weigh up
A holding structure also has costs and trade-offs. Companies under common control are usually associated companies, and the £50,000 and £250,000 corporation tax limits for the small profits rate and marginal relief are divided between them, so several small companies can pay a higher effective rate than one. Money you take out personally is still taxed as your income. Each company needs its own accounts and Company Tax Return, which adds cost, and lenders’ criteria for holding structures vary. It is worth taking professional tax advice before setting up a structure.
Comprehensive service: Legal and accounting under one roof
Running a holding structure takes care with the details. Lenders may check a company’s SIC code when assessing a buy-to-let application, and dividends should be properly documented (for example, with board minutes and dividend vouchers).
Extend Finance works with Legistra®, which provides legal and accounting services. A holding structure should be assessed in light of your circumstances, tax position, legal requirements and lender criteria; no particular legal, tax or financial outcome is guaranteed.
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Legistra can design and register a holding structure (details of our offer can be found here: Holding Registration in the UK).
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Legistra can provide accounting services for all companies in the group.
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Legistra can advise on group relief, subject to the applicable tax rules and your companies’ circumstances.
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Legistra can help prepare internal documentation, such as resolutions and dividend vouchers, according to the requirements that apply to your companies.
For details of the services available and their suitability, contact Legistra directly.
Agata Mazur
Qualified Lawyer / Legistra® Ltd
(+44) 024 7736 0006
FAQ
Frequently asked questions
Are dividends from a subsidiary to a holding company taxed?
A dividend paid by a subsidiary to a UK parent company that controls it is generally exempt from Corporation Tax, provided the Part 9A conditions of the Corporation Tax Act 2009 are met. The subsidiary still pays Corporation Tax on its own profits before any dividend is paid.
What is group relief and which companies qualify?
Group relief lets a company with an eligible loss surrender it to another company in the same group to reduce that company’s taxable profit. Broadly, one company must be a 75% subsidiary of the other, or both must be 75% subsidiaries of the same parent; companies you own personally do not form a group for this purpose.
Does a holding company protect my other properties?
Keeping properties in separate companies can help limit how far a legal problem or claim in one company affects the others, but the separation is not absolute. Personal guarantees given to lenders, and cross-guarantees or charges between group companies, can link them.
Can I get a buy-to-let mortgage for an SPV owned by a holding company?
Many lenders offer buy-to-let mortgages to SPVs, but criteria for companies owned by a holding company vary by lender, and they usually ask for personal guarantees. See can a limited company take out a mortgage for more detail.
Should I move properties I already own into a company?
Moving properties you already own into a company is usually treated as a sale at market value, so it can trigger Stamp Duty Land Tax (or its Scottish or Welsh equivalent) and Capital Gains Tax. Speak to a qualified tax adviser before you restructure a portfolio.
