What is a Holding Company?

A holding company is a business entity that owns the assets of other companies and works by holding a controlling interest in other companies rather than having its own business operations. It is also known as a parent company or umbrella company. A holding company contains one or more smaller subsidiary companies that benefit from a pool of wealth and resources that they would not be able to access alone. They typically have the structure of a corporation or limited company.

A holding company oversees the corporate activities of its subsidiary companies, although it does not actively participate in making operational decisions. That said, a holding company will often actively shape the policies, messaging, branding and even the company name of a subsidiary, even if it does not involve itself in the day-to-day operations.

How does a holding company work?

Holding companies do not manufacture goods, provide services to the general public or behave in other ways that usually characterise business operations. Instead, they work exclusively by controlling other companies. They do this by holding assets such as property, land, stocks, patents and trademarks from their subsidiary companies. While individual shareholders may own shares in a holding company, the holding company can own 100% of the shares in its subsidiaries. These are known as ‘wholly-owned subsidiaries’.

The company structure of a holding company insulates it against the legal liability and financial losses of individual companies within its group structure. Therefore, if a subsidiary should go bankrupt, its creditors cannot pursue the holding company for remuneration.

Holding companies can also reduce their tax liability by locating certain subsidiary operations in areas with lower taxes (such as the Channel Islands where there is no VAT, corporate income tax or capital gains tax).

Different types of holding company

Different holding companies work in different ways, depending on their size, scope and operations.

Different types include:

• Pure holding companies which exist only to own other companies

• Immediate holding companies own other companies but are not owned by a parent company

• Intermediate holding companies are holding companies that are also part of a larger parent company

• Mixed holding companies, or holding-operating companies, are companies that own other companies but also have their own business operations

Pros and cons of holding companies

Holding companies can be advantageous both to parent companies and subsidiaries. However, they also have certain caveats. Let’s take a look at the pros and cons of holding companies.

Advantages of a holding company

• Protected against the financial losses and legal liabilities of their subsidiaries

• Can provide tax advantages to parent companies

• Company structure means better asset management for subsidiaries

• Can provide better access to loans, business growth and capital

Disadvantages of a holding company

• Holding companies are less transparent which may make them less appealing to potential shareholders

• Parent companies may force subsidiaries to make changes in personnel or operations

• Unscrupulous holding companies may asset-strip subsidiaries for their own gain

Holding company FAQs

Can a holding company buy other companies?

Yes. As well as companies coming together under a holding company structure, holding companies can and do purchase other companies. This can allow companies to make acquisitions while retaining the company as a separate business entity.

Do holding companies pay tax?

Generally, holding companies do not trade. However, some do generate income from trading or leasing assets it holds to its subsidiary companies. In this case, they will have the same corporation tax obligations as any other company.

The income generated within the holding company will also be subject to corporation tax, but the corresponding expense from subsidiaries is deducted, reducing the overall corporation tax liability.

The owners of holding companies are paid in dividends and therefore pay tax on these at a lower rate than they might pay in income tax.

What are some of the UK’s biggest holding companies?

Some of the UK’s biggest holding and parent companies include:

• Berkshire Hathaway

• Eurostar

• Tesco

• Unilever

• Virgin Group