07718128235
omar@aswatax.co.uk
07718128235
omar@aswatax.co.uk
April 22, 2024

Why You Need to Consider a Linked Investment Holding Company

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In the world of finance, there are various structures that business owners and investors can leverage to achieve their financial goals. 

One such structure gaining traction is the Linked Investment Holding Company (LIHC).

A Linked Investment Holding Company (LIHC), otherwise known as a Personal Investment Company (PIC), can be introduced when business owners are planning to start utilising the excess profits and surplus cash within their trading business(es) to explore investment opportunities outside of normal operations.

I usually see business owners exploring the property market although in more recent months, I have had chats with younger entrepreneurs looking at investments like Crypto.  And this still works!

So, in this blog post, I’ll delve deep into the essence, benefits, and practical considerations of integrating a linked investment holding company into your investment strategy, highlighting the holding company structure as a pivotal component for savvy investors and business owners alike.

What is a Linked Investment Holding Company (LIHC)?

At its core, a linked investment holding company serves as a parent company that holds enough voting stock in another company to control its board of directors, thereby exerting significant influence or outright control over its subsidiaries' business operations.

Unlike pure holding companies, which exist solely to own other companies, linked investment holding companies may also engage in their own operations, investments, and strategic initiatives, creating a robust group structure that spans various industries or sectors.

How Linked Investment Holding Companies Work

The holding company structure allows for a strategic layer of management and financial efficiency.

By owning shares in subsidiaries, the holding company can influence or directly manage these entities without the complexities and risks associated with day-to-day business operations.

This separation provides limited liability, shielding the parent company from financial losses or legal challenges faced by the subsidiaries.

Furthermore, this structure facilitates tax planning strategies by allowing income, dividends, and capital gains to flow through the holding company, potentially reducing overall tax liability.

Key Benefits of Investing in a Linked Investment Holding Company

Investing in or setting up a linked investment holding company offers numerous advantages, from operational flexibility and tax benefits to risk mitigation and strategic growth opportunities. 

Let’s first take a look at the problem a Linked Investment Holding Company aims to solve before we talk about the potential solutions as key benefits.

holding company Works
Holding company Works

PROBLEM

Funds are parked within TradeCo(s). With certainty, it would be disastrous to begin purchasing properties within the same entity for multiple reasons, both from a commercial and tax perspective.

It is undesirable to “mix” the trading activity in the main business with investment pursuits, in the same corporate entity or group with one out of many reasons being losing of valuable reliefs (continue on for more specifics).

Elsewhere, drawing the funds into a personal capacity will give rise to massive dividend taxes of up to 40%, even before a single penny has been invested! Notice the tax leakage with this.

Most BTL landlords are putting properties INTO a Ltd company structure and you're there extracting funds, paying massive amounts of personal tax and then purchasing the residential property let's say in your name... doesn't add up.

There are always better ways...

SOLUTION

By way of a holding company group structure and the introduction of an LIHC or PIC, we can ensure that business owners' goals are achieved tax efficiently.

[Note: a HoldCo is not entirely necessary although this needs to be reviewed]

Key benefits and advantages of this structure include:

  • The structure ensures that the resulting investment activity will be protected from commercial risk in the operating company (and vice versa).
  • The implementation of a LIHC will allow you to transfer surplus cash from the trading group to the personal investment company which will sit outside of the trading company or trading group.
  • Under this structure, cash can be regularly extracted from HoldCo to LIHC completely tax-free via dividends. This cash can then be invested into new ventures as planned for.
  • The transfer of excess cash and isolating future non-trading activities from HoldCo would mean that a number of tax reliefs may be preserved, including business asset disposal relief (BADR) for capital gains tax and business relief (BR) for inheritance tax.
  • When it is time for owners to look at an exit from the operating business (either individually or collectively), having a LIHC in place can provide flexibility over how and when they extract their sale proceeds and, consequently, how, when (and if), those funds are subjected to taxation.
  • Last but not least, the ownership of the LIHC can be different to that of the trading group. This will afford the owner a chance to introduce other members of their family, and thereby to access the additional taxation reliefs and allowances applicable to those other individuals.

Considerations Before Investing in a Linked Investment Holding Company

While the advantages are compelling, there are important considerations to keep in mind when evaluating the potential of investing in or setting up a linked investment holding company.

  1. Understanding the Risks

Despite the benefits of limited liability and risk management, investing through a holding company structure is not without its risks.

Market volatility, regulatory changes, and operational challenges within subsidiary companies can impact the overall performance and value of the holding company.

So you need to conduct thorough due diligence and consider the financial health, industry position, and growth prospects of the subsidiaries and the holding company itself.

  1. The Importance of Due Diligence

Like earlier said, before investing in or establishing a linked investment holding company, conducting comprehensive due diligence is crucial. This process should assess the legal, financial, and operational aspects of the holding company and its subsidiaries.

Evaluating the corporate tax implications, legal and accounting costs, and the managerial expertise of the holding company’s management is essential for making an informed investment decision.

  1. Regulatory and Compliance Aspects

As a potential investor, you must also consider the regulatory environment and compliance requirements related to holding companies.

This includes understanding the corporate governance standards, tax reporting obligations, and legal responsibilities that come with owning and operating a holding company and its subsidiaries.

Navigating these regulatory landscapes requires careful planning and often the guidance of legal and financial professionals.

Best Tax advisor in UK
Best Tax advisor in UK

How to Get Started with a Linked Investment Holding Company

If you are considering the strategic move of investing in or setting up a linked investment holding company, the journey begins with informed decision-making and strategic planning.

Some important steps to take would be;

  1. Assess Your Needs: Begin by evaluating your financial goals, investment portfolio, and the specific benefits a Linked Investment Holding Company can offer your situation. This initial assessment is crucial for determining the structure that best suits your objectives, whether it's consolidating assets for easier management or optimising tax efficiency.
  1. Consult with Professionals: Before taking any concrete steps, consult with financial advisors, tax professionals, and legal experts familiar with UK regulations. Their insights will be invaluable in navigating the complexities of setting up a holding company, ensuring compliance, and aligning with your financial and tax planning strategies.
  1. Choose Your Structure: Decide on the most suitable structure for your holding company based on the advice received and your financial assessment. This decision will impact how you manage investments, tax implications, and legal obligations. In the UK, understanding the distinctions between different corporate structures and their respective benefits is vital.
  1. Register Your Company: With a structure in place, the next step is to register your Linked Investment Holding Company with Companies House in the UK. This process involves choosing a company name, preparing the necessary documentation (such as the Memorandum of Association and Articles of Association), and fulfilling any specific registration requirements for holding companies.
  1. Open Bank Accounts: Establishing dedicated bank accounts for your holding company is essential for managing finances separately from your personal assets. This separation is crucial for financial clarity, tax purposes, and legal protection.
  1. Transfer Assets: Once your holding company is operational, you can begin the process of transferring assets into it. This step should be carefully managed to ensure that asset transfer aligns with legal requirements and tax planning strategies, potentially involving the revaluation of assets and considerations for capital gains tax.
  1. Implement Governance Structures: Establish clear governance practices for your holding company, including regular financial reviews, investment strategies, and compliance checks. Effective governance is key to managing risks, optimising performance, and ensuring the holding company serves its intended purpose.
  1. Continuous Monitoring and Adjustment: Finally, the successful management of a Linked Investment Holding Company requires ongoing monitoring of its performance and the legal and tax landscape. Be prepared to make adjustments to your strategy and holdings in response to changing financial goals, market conditions, and regulations.

Tax Implications On A Linked Investment Holding Company In UK

A compelling reason to consider a linked investment holding company is the potential for tax benefits. 

These entities can be structured to optimise tax liability across the group structure, utilising tax planning strategies such as income splitting, tax deferral, and the accessing of lower corporate tax rates or tax exemptions available in certain jurisdictions. 

Income tax, capital gains, and dividends can be managed more effectively within a holding company framework, potentially resulting in significant tax savings.

  • Tax Deferral on Capital Gains: In some cases, an LIHC may allow for deferring capital gains taxes on the sale of investments within the holding company structure. This can be particularly advantageous if you plan to reinvest the proceeds from the sale into other assets within the LIHC.
  • Flexibility in Dividend Distribution: LIHCs provide more flexibility in structuring dividend payouts. The holding company can choose to reinvest profits back into the subsidiaries for growth or distribute dividends to shareholders with minimal tax implications compared to directly owning the subsidiaries.
  • Estate Planning Advantages: LIHCs can be a valuable tool for estate planning. Transferring ownership of the LIHC to heirs can be a streamlined process compared to transferring individual assets. Additionally, the LIHC structure may offer tax benefits for beneficiaries inheriting the holding company.

The Future of Linked Investment Holding Companies

Trends and Predictions

The landscape for linked investment holding companies is evolving, driven by global economic trends, technological advancements, and regulatory changes.

A key trend is the increasing use of technology and digital platforms for business operations, enhancing efficiency and opening new investment avenues.

Additionally, there's a growing emphasis on sustainable and socially responsible investments, with holding companies playing a pivotal role in directing capital towards green technologies and initiatives.

Holding Companies Investment
Holding Companies Investment

Predictions for the future include a rise in cross-border investments, as holding companies leverage their global networks and financial resources to tap into emerging markets and sectors.

Furthermore, regulatory frameworks are expected to evolve, potentially impacting tax planning strategies and corporate governance practices. Investors and business owners should stay informed and adaptable to these changes to maximise their strategic advantage.

Conclusion

In conclusion, leveraging a linked investment holding company can significantly benefit you as an investor and business owner by offering portfolio diversification, risk management, and tax efficiencies.

This approach allows for strategic growth and access to unique investment opportunities, making it a valuable tool in the modern financial landscape.

With proper planning and due diligence, the advantages of holding companies—from tax benefits to limited liability—can be fully realised, positioning stakeholders for success in a competitive market.

Hope you found this useful. And if you have any questions or need the help of a professional guide, then feel free to reach out to us at ASWATAX.

To your success!

Meet Omar

Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn.
Book a call today to learn more about what Omar and ASWATAX can do for you.

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