Personal Holding Company

[mickael28]

I am unsure what your second question is, but if the trading company was found to be caught by IR35 it would need to find the cash to make the tax and NI payments it owes. If money has been loaned to the investment company, it would need to be recovered unless the funds can be raised another way.

Thanks Martin. I was reading an article from InTouch about how to use the surplus in a ltd company and they said:

Protecting Investments or surplus funds and ring fencing

Operating as a contractor is generally considered to carry low commercial risk, but you should always be aware of:

1. Any uninsured business risks for negligence - avoidable by taking out adequate professional indemnity
insurance, and

2. Claims made under IR35 by HM Revenue & Customs (HMRC) - a measurable risk with the help of a specialist contractor accountant

If you believe these risks remain in your business, you should consider protecting your retained profits, and any subsequent investments that are made with the money.
This can be achieved in various ways, but a common solution involves creating a separate company (owned by you) that holds a special class of shares in your main company.
Surplus income could be declared as a dividend to the new company via the special shares. The new company does not have to pay tax on the dividends received and, once received, the funds belong to the new company.
Generally, the money held by the new company is then free of any commercial risk that existed in your contracting company. Caution and advice is recommended and the overall value of the investments being protected needs to be sufficient to make the extra effort worthwhile.

So I was understanding the sentence "the money held by the new company is then free of any commercial risk that existed in your contracting company", as if the LTD company was not at risk of a possible IR35 claim for the money transferred to the new company, although it seems by reading your post that this would not be the case and the money will need to come back to the Ltd company?

I see that *Clare from InTouch* was in this topic before, if you could please clarify that point?

Further info: http://www.intouchaccounting.com/wp-...urpluscash.pdf

[Martin at NixonWilliams]

I think that in the last few years the CT rates have been converging, is there any benefit in investing the surplus retained in your trading company diretly there rather than creating another Investment company?

If you pass the money to the new company, could it be claimable by HMRC under a possible IR35 investigation? or is it totally safe with the new structure?

The higher rate of CT is not worth worrying about now, it is only 1% higher and is expected to be 20% across the board very soon. The main benefit of using the same company is for simplicity, and the saving made in accountancy fees etc. but there are other issues involved with having an associated company, such as your ability to use the flat rate scheme and the effect it has on your corporation tax bands (again, less important nowadays).

I am unsure what your second question is, but if the trading company was found to be caught by IR35 it would need to find the cash to make the tax and NI payments it owes. If money has been loaned to the investment company, it would need to be recovered unless the funds can be raised another way.

I hope this helps.

Martin

[mickael28]

There's no reason you can't make those same investments from your current company though, unless you're worried that they form a significant part of your income and there's a danger of the company being seen as an investment company (which would then be subject to a higher rate of CT).

I think that in the last few years the CT rates have been converging, is there any benefit in investing the surplus retained in your trading company diretly there rather than creating another Investment company?

If you pass the money to the new company, could it be claimable by HMRC under a possible IR35 investigation? or is it totally safe with the new structure?

[Clare@InTouch]

Ah sure, so it's either pull out the money from your Ltd, pay your tax, and own it personally or spin up a holding company transfer money tax free into the new company and own it inside there.

Obviously it requires some number crunching, but it would seem to me that the latter is probably more sensible, especially in terms of buying more stuff quickly as you defer your tax payment?

Am I missing something? Is money transferred by buying an asset in a holding company classed as profit or something?

But it can get complicated as I said - if you're looking at a second company then you'd need to fully check out the rules for VAT flat rate and associated companies, and check out what effect, if any, it would have on you. More details here:

HM Revenue & Customs

Transferring money from one company to another won't effect your CT in either company.

[b0redom]

Ah sure, so it's either pull out the money from your Ltd, pay your tax, and own it personally or spin up a holding company transfer money tax free into the new company and own it inside there.

Obviously it requires some number crunching, but it would seem to me that the latter is probably more sensible, especially in terms of buying more stuff quickly as you defer your tax payment?

Am I missing something? Is money transferred by buying an asset in a holding company classed as profit or something?

[Clare@InTouch]

Eh? Is the holding company not classed as a separate entity for accounting purposes?

I'd have thought that you'd need a LOT of properties to be pulling down 73k / year (new VAT threshold).

To be honest, if I were I'd probably retire!

No, what I mean is that if you own a property through your contracting company, and you're flat rate registered, you have to pay flat rate on the rental income you receive. If you're thinking of buying property you may therefore want to discuss other options with your accountant.

[b0redom]

Eh? Is the holding company not classed as a separate entity for accounting purposes?

I'd have thought that you'd need a LOT of properties to be pulling down 73k / year (new VAT threshold).

To be honest, if I were I'd probably retire!

[Clare@InTouch]

I guess it's worth it if you're thinking of holding a property portfolio and/or shares. My understanding is that if you hold them inside your normal Ltd you run the risk of it being reclassified as an investment company rather than a real trading company.

I guess it would be worth it if you were holding a couple of properties and their combined income was under the VAT threshold?

If you have rental property that you're getting income from then it's worth thinking about, as under the flat rate VAT scheme you'd have to pay VAT on the income even though you can't charge it to the tenants. It can be slightly complicated though, so worth discussing with your accountant if it applies to you.

[b0redom]

I guess it's worth it if you're thinking of holding a property portfolio and/or shares. My understanding is that if you hold them inside your normal Ltd you run the risk of it being reclassified as an investment company rather than a real trading company.

I guess it would be worth it if you were holding a couple of properties and their combined income was under the VAT threshold?

[Martin at NixonWilliams]

Surely, the knock on positive effect of a personal holding company, is that when you have finished with that company (is your 5 year investment bonds have matured), you can possibly close it down and only pay entrepreneurs relief @ 10%??

Hi Morphman

To be eligible for entrepreneurs relief you have to, amongst other criteria, have held shares in a trading company. If you purely hold investments in a holding company it is likely to be classed as an investment company and as such entrepreneurs relief would not be available.

Martin

[morphman]

Surely, the knock on positive effect of a personal holding company, is that when you have finished with that company (is your 5 year investment bonds have matured), you can possibly close it down and only pay entrepreneurs relief @ 10%??

[Clare@InTouch]

If you have a second company that holds shares in your current company then you could pay dividends into that company, and there's no tax charge on them. The money is then effectively moved into that second company, and you can use it to make investments.

There's no reason you can't make those same investments from your current company though, unless you're worried that they form a significant part of your income and there's a danger of the company being seen as an investment company (which would then be subject to a higher rate of CT).

[contractoralan]

6.Rather than pay tax on money drawn from the company to invest, consider forming a Personal Holding Company to receive the money tax-free and to make the investments

12 ways IT contractors can pay less tax :: Contractor UK

What is a personal holding company ? Anyone using it currently?