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William and Kate plan to start a business focused on purchasing, renovating, and selling properties for profit but also wish to hold onto some of their investments as buy to let properties. Additionally, they plan to acquire some commercial properties for let. To optimise their business operations and manage risks effectively, they are considering using a Group Structure.
What is a group structure?
This structure involves one company owning the shares in one or more other companies. The top company in the structure is called a holding company, which oversees subsidiary companies. These subsidiaries are all controlled by the holding company.
Typically, the holding company will not hold any assets or manage any properties. Its sole purpose is to facilitate and oversee the group.
Group Structures
William and Kate will establish a holding company at the top of the structure, with both of them as shareholders of the holding company. Then each time they purchase a property for renovation, they will incorporate a new subsidiary company underneath the holding company, in this case:
Long-term rental properties
Buy, renovate and sell properties
Commercial properties
Advantages of a group structure
A group structure can offer a number of advantages:
Ringfencing assets and liabilities
A subsidiary company can be used to ringfence assets or liabilities, with each company in the group having limited liability. Therefore, if you are carrying on different trades such a Buy to Let, Buy to Sell or New Build, by using a subsidiary for that purpose you can keep the assets of the business in a different group company and therefore safeguard them from the risk of any of the other activities going wrong.
Centralised functions and assets
A group company can be used to hold, centrally, certain group assets e.g. property or intellectual property, which can then be used across the other group companies, for example by leasing or licensing them. This allows the group to exploit its assets commercially, whilst endeavouring to protect them from commercial and financial risk.
Tax benefits
One of the main advantages of a group structure over separate companies with common ownership is that, subject to various conditions being met, group companies have the benefit of a number of tax exemptions and reliefs between them. These include applying certain tax losses and reliefs across the group, transferring of assets between group companies and also Corporation Tax and Stamp Duty Land Tax exemptions.
Eventual sale
In the future, William and Kate may wish to sell some of their properties. A group company structure may help them to do so, particularly if they want to retain part of the business for future generations. Other potential advantages include making corporate pension contributions, extracting dividends more efficiently and also rewarding key employees in one company without affecting other companies.
This might be particularly useful when it comes to selling a property. If William and Kate are willing to buy the shares, then their Stamp Duty charge is just half of one percent. This compares very favourably compared with the Stamp Duty Land Tax rates if they were to buy in their personal names or directly into a limited company.
Disadvantages of a group structure
Whilst group structures offer certain benefits, their disadvantages, such as increased complexity, higher compliance costs, and the division of the small profits Corporation Tax rate among associated companies, must also be carefully considered and weighed against the advantages.
When it comes to property investment, a group structure is often unattractive to lenders and you may find many will not consider lending.
Another issue is the mixing of trading and investment activities within the group which can lead to certain reliefs being lost or restricted such as Business Asset Disposal Relief (BADR).
BADR is particularly advantageous upon the winding up or sale of a limited company if certain qualifying conditions are met. The activity of Buy, Renovate and Sell is a trading activity and would qualify for BADR. However, by acquiring investment properties in a trading subsidiary, this may taint the company’s qualifying status for BADR.
A group structure can offer some advantages for landlords, but care and professional advice should be taken first to fully assess the advantages and disadvantages.
