As business owners and entrepreneurs face rising tax costs on dividends and a period of economic uncertainty it is now more important than ever to ensure their business structure is fit for purpose.
Standalone companies offer little flexibility to build passive investments.
Profits are either taken as dividends resulting in significant income tax or invested by the company in property or other assets where these assets are exposed to the trading risk of the business – simply these assets could be used to settle company liabilities if it became insolvent.
However alternative structures can be established to protect assets, structure ownership between family and pass on wealth.
Establishing a holding company - the “Parent”, above a trading company is one alternative.
Principally this protects valuable assets in the Parent from the debts and liabilities of the trading company.
Tax savings can also be achieved as dividends paid to the Parent are not subject to corporation tax leaving more cash available for investment.
However, if the trading company is sold, the proceeds will go to the Parent not the entrepreneur.
Under an alternative hybrid structure, share capital in a trading company is split between the entrepreneur and the Parent.
Dividends can be paid to the holding company where cash can be invested, and ringfenced from the trading activities and if the trading company is sold the proceeds will go the entrepreneur which maintains valuable tax reliefs.
By making wider family members shareholders in the Parent the structure can also be used to help plan for succession and reduce inheritance tax.
If you are considering the restructure of your business, seeking the advice of a Pierce tax specialist can ensure the best outcome for you and your business.
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