How a Holding Company CAN save you tax if selling your practice

Hi everyone,   

With recent changes announced in the budget, we are advising clients who run their dental practice through a limited company and directly own the shares in it personally, to consider putting a holding company above the trading company.

Why?

Under current tax legislation, a limited company that owns more than 10% of the shares in a trading company for more than a year qualifies for the substantial shareholding exemption. This means that if the holding company sells those shares it doesn’t have to pay any Corporation Tax (or Capital Gains Tax) on the sale of the trading company.

As a result, it is possible to sell your trading company and pay no tax at all, and we have a several clients that have done exactly that in recent times.

There must be a catch, right?

Well yes there is, and in some cases it’s a pretty big one! The proceeds from selling your company are now in your holding company, and you’ll face tax withdrawing the funds personally. Usually that means dividend tax on getting at the proceeds from the sale, which rather defeats the purpose!

But it all depends what you plan to do with those proceeds.

If the plan is to pay off your mortgage, or go on a one year cruise, then as above, having a holding company isn’t much of an advantage.

However, we see people selling businesses and investing the proceeds in other businesses, or buy to let properties, or stocks and shares, or more often than not a mixture of all of these! In this case, there is no need to withdraw the proceeds personally and you can achieve 0% tax on selling your trading business!

So, what if you don’t know yet what you want to do when you come to sell the trading company in the future? In this case bear in mind that you always have the option of liquidating the holding company to access the proceeds as capital, which then puts you in the same position as if you held the trading company shares personally, and you’ll face Capital Gains Tax, with the same reliefs.

There are of course other advantages to having a holding company, such as protecting surplus profits from the trading company and giving you a vehicle to invest those profits separately to the trading company. If you plan to invest surplus profits in buy-to-let properties, for example, and wish to take a mortgage then you’ll find that most mortgage lenders won’t lend to a trading business, however successful it might be, and therefore you’ll need a separate company (special purpose vehicle, SPV) to hold the property in.

Moving your shares into a holding company needs careful consideration and there is a process to follow to do so without triggering Capital Gains Tax or stamp duty on the current value of the shares. This is called share for share exchange, and we have carried this out for many Dental clients over the years.

Want to know more please get in touch please book a call with me on the link below:

Thanks,

Arun