When is a holding company a good idea?
I’ve always believed in keeping it simple and encouraged clients to rather have common shareholders in separate companies than have a holding company in which the various parties own shares. But there’s one clear exception –
Let’s say you have a very profitable company in a high risk business and the company is owned by your trust. Is the trust at risk? No, but the profits are stuck in the company unless it declares dividends to the trust. So now, after the deduction of the Dividends Witholding Tax (DWT at 20%), the trust sits with 80% of the cash. What can it do with it? It can lend it to another of its companies to be invested in a low risk business and that is probably the second best solution.
However, I prefer that the trust owns a holding company which does two things. One, it owns the shares in the high risk business and two, it invests in a low risk business such as listed shares for dividends or fixed property for rental income. Now the high risk company makes its profits and pays its tax, then declares the spare cash to its holding company as a dividend. There’s no DWT between companies, so the holding company has 100% of the cash to invest in its low risk business. By syphoning the retained profits out of the high risk business, you are removing them from the risk area.