Shares in a holding company qualify for business relief if the company’s business consists wholly or mainly of being the holding company of trading subsidiaries, even though owning shares is itself an investment activity. HMRC looks at the group as a whole, then strips out the value of any subsidiary that is itself an investment business, and treats surplus group cash as an excepted asset that gets no relief.

Why does a holding company need a special rule?

Section 105(3) of the Inheritance Tax Act 1984 (IHTA 1984) denies relief where a company’s business consists wholly or mainly of making or holding investments. HMRC’s Inheritance Tax Manual points out that a pure holding company’s sole activity is holding investments, namely the shares in its subsidiaries (IHTM25263). Without a carve out, every family group with a top company would fail.

The carve out is section 105(4)(b). Section 105(3) does not apply to shares in or securities of a company whose business consists wholly or mainly in being a holding company of one or more companies whose business does not fall within section 105(3). In short, the parent qualifies if what sits underneath it is mainly trading. For how the structure works for corporation tax, see holding company tax.

What counts as a holding company and a subsidiary?

Section 103(2) says a company and all its subsidiaries are members of a group, with holding company and subsidiary taking their meaning from section 1159 of the Companies Act 2006. HMRC’s Shares and Assets Valuation Manual (SVM111190) summarises it: a company is a subsidiary if the other company holds a majority of its voting rights, or is a member with the right to appoint or remove a majority of the board, or is a member that controls a majority of the voting rights under an agreement with other members. A subsidiary of a subsidiary is also a subsidiary of the top company.

That definition excludes minority stakes. HMRC treats interests in 50:50 joint ventures as minority interests, not controlled subsidiaries, whether or not the joint venture is actively managed (IHTM25263). A minority stake therefore counts as an investment of the company holding it, not as part of the group.

How does HMRC decide whether the group qualifies?

HMRC’s approach has two stages (IHTM25263 and SVM111190):

  1. The group as a whole. HMRC examines the activities, income sources and asset values of the parent and each subsidiary to decide whether the group is mainly investment or non investment. If it is mainly investment, the parent’s shares fail section 105(3) altogether.
  2. Each subsidiary in turn. If the group passes, HMRC considers each subsidiary, top down or bottom up, to see whether section 111 requires the relief to be restricted.

Intermediate holding companies are allowed in any number but cannot be ignored or looked through. Each tier is looked at separately, and foreign companies in the structure make no difference to the approach. HMRC adds that valuers cannot always judge the position from consolidated accounts alone and may call for subsidiary accounts.

What happens if one subsidiary is an investment company?

Section 111 applies where a company is a member of a group and another member’s business falls within section 105(3). The value of the shares is then taken to be what it would be if that other company were not a member of the group. HMRC stresses that this does not normally mean apportioning the agreed share value by the ratio of qualifying to non qualifying assets; it means revaluing the shares without that subsidiary (SVM111190).

There are two exceptions. Section 111 does not bite where the subsidiary’s business is itself mainly being the holding company of trading companies, or where it mainly holds property occupied by group members whose businesses qualify. So a property subsidiary that owns the group’s own factory or offices does not restrict relief, while one that lets flats to outsiders does.

The rule creates an anomaly HMRC openly acknowledges. If a single company is mainly trading but also has a minor investment activity, its shares can qualify in full, because the investments are part of a mainly trading business. If the same investment activity is moved into a wholly owned subsidiary where it is the main activity, section 111 removes its value from relief (SVM111190). Restructuring a company into a group can therefore reduce relief.

What about minority stakes held by the parent?

HMRC’s example at IHTM25263 describes a parent that trades itself, owns the premises used by a trading subsidiary, owns a property investment subsidiary and holds 25% of another trading company. Relief is given on the premises used by the subsidiary, whether or not rent is paid. The investment subsidiary is removed under section 111. The 25% stake does not affect relief if it is used in the parent’s business and does not dominate the parent’s activities.

The balance can tip the other way. In HMRC’s example at IHTM25264, a company with a modest trade of its own holds 30% of another company, and the dividends and value of that stake far outweigh its own trade. HMRC would generally treat it as an investment company, so its shares get no relief at all.

How is cash held in the group treated?

Section 112 removes the value of excepted assets from relief. An asset is excepted if it was neither used wholly or mainly for the business throughout the last two years (or the period the group owned it), nor required at the time of the transfer for future use in the business. In a group, use by another group member counts, provided that member was in the group at the time of use and immediately before the transfer and is not disregarded under section 111 (section 112(2) and SVM111240).

Surplus cash is the usual target. HMRC’s valuation manual says cash beyond the present and future needs of the trade is an excepted asset, because it is not used in the business and involves no activity that could make it a separate business (SVM111220). The future use test needs more than a hope. In Barclays Bank Trust Co Ltd v CIR the company needed about £150,000, and a further £300,000 was held to be an excepted asset because “required” implies an imperative that the money will be used on a given project or for some palpable business purpose (SVM111230). By contrast, in Brown’s Executors v IRC, sale proceeds of a nightclub held on deposit while the owner actively looked for replacement premises did not turn the company into an investment business.

HMRC also recognises seasonal patterns, and specifically mentions travel agents and insurance brokers, which hold large sums for some months before paying them over (SVM111230). The amount treated as excepted is the difference between the share value with and without the asset, with any debt charged on it netted off (SVM111250).

Illustration only.

Hana owns all of Topco, which owns Tradeco (a manufacturer), Propco (which owns Tradeco’s factory) and Letco (which lets houses to the public). Topco also has £2 million of cash, of which £600,000 is needed for working capital and an approved machinery order.

  • The group as a whole is mainly trading, so Topco’s shares can qualify.
  • Propco’s factory is occupied by Tradeco, so section 111 does not exclude it.
  • Letco is an investment business, so Topco is valued as if Letco were not in the group.
  • About £1.4 million of cash is likely to be an excepted asset with no relief.

The qualifying value gets 100% relief within Hana’s £2.5 million allowance and 50% above it.

How did the 2026 changes affect holding company shares?

Unquoted shares that are not traded on any exchange still fall under section 105(1)(bb) and qualify for 100% relief, but from 6 April 2026 only up to the 100% relief allowance (IHTM25570). The allowance is £2.5 million of combined business and agricultural property for individuals, less amounts used by chargeable transfers in the previous seven years, with 50% relief above it (IHTM25510). Shares traded on a recognised stock exchange without being listed, such as AIM shares, get 50% only. Excepted assets get no relief at either rate, so trimming surplus cash out of a group is worth reviewing alongside the allowance.

What should owners check?

  • Map every company in the group and its main activity, including dormant or property companies.
  • Check that property subsidiaries let mainly to group trading companies, not outsiders.
  • Keep board minutes and budgets showing why cash is needed, with specific projects and dates.
  • Watch for minority stakes and joint ventures that could dominate a small parent’s activity.
  • Remember that a property owning partnership or LLP above the group gets no relief (IHTM25264). See also property letting companies and setting up a holding company.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.