Investing directly vs. through a holding company

It's quite common in continental Europe for private equity investors or entrepreneurs to invest in projects through a holding company, either onshore of offshore. Not quite so in the UK, mostly because a number of tax benefits are not available in such a situation. And yet it might be a good idea nonetheless. Let's look at the pros and cons of each approach.

Benefits of investing directly

If you are investing in a company that has the EIS or SEIS status, you need to do the investment directly in order to benefit from the generous tax breaks.

If you sell investments you will be taxed only once vs having the holding company pay tax on the gain first and pay tax again when you extract the profits from the holding company.

And also, investing directly is cheaper because you don't need to maintain another structure.

Benefits of investing through a holding company

If your investment distributes surplus profits regularly to the holding company, no dividend tax is due since dividends are only taxed when they are distributed to the final shareholders. That allows you to ring-fence those profits as if the underlying investment were to go bankrupt, those profits are now protected one level up.

Another benefit is that when you have multiple investors, they will probably have different time preference when it comes to profit extraction. Having a holding company allows you to be neutral to the timing of those distributions since the tax point is now decided by the extraction at the holding level.

One of the benefit of direct investing is the avoidance of double taxation. However there are situations where those can be avoided. Such a case is the Substantial Shareholding Exemption where the holding company owns more than 10% of an investment for the last 2 years.

And finally, if you keep the profits in the holding company to be reinvested, you can delay the dividends tax forever.