Can a subsidiary own shares in its parent

Generally no. Section 136 of the Companies Act 2006 says a body corporate cannot be a member of a company that is its holding company, and any allotment or transfer of shares in a company to its subsidiary is void. The only exceptions are for a subsidiary acting as personal representative or as a trustee with no group beneficial interest, a subsidiary dealing in securities as an intermediary, and shareholdings that began at a time when the prohibition did not apply.

What exactly does section 136 prohibit?

Section 136 is in Chapter 4 of Part 8 of the Companies Act 2006, which deals with a company’s members. It has two limbs. First, except as the Chapter allows, a body corporate cannot be a member of a company that is its holding company. Second, any allotment or transfer of shares in a company to its subsidiary is void. Section 136(2) lists the exceptions as section 138 (personal representative or trustee) and section 141 (authorised dealer in securities). Section 137 then deals separately with shares held before the prohibition applied.

The word “subsidiary” has its section 1159 meaning. A company is a subsidiary of another if that other company holds a majority of the voting rights in it, is a member and has the right to appoint or remove a majority of its board, or is a member and controls a majority of the voting rights alone under an agreement with other members. It is also a subsidiary if it is a subsidiary of a company that is itself a subsidiary of the other company, so the rule reaches down the whole chain. Section 1159(4) says “company” in that definition includes any body corporate, so an overseas subsidiary of a UK parent is caught as well.

Two further provisions close obvious gaps. Section 144 applies the Chapter to a nominee acting on behalf of a subsidiary in the same way as to the subsidiary itself, so routing the shares through a nominee does not help. Section 143 extends the rule to companies not limited by shares, by reading “shares” as the interest of members, whatever its form.

Who is not caught by the rule?

The prohibition only bites on membership of the subsidiary’s own holding company. A company holding shares in a fellow subsidiary (a sister company in the same group) is not holding shares in its holding company, so section 136 does not apply to that holding. Equally, a parent holding shares in its subsidiary is the normal group structure and is unaffected.

Section 136 also speaks of membership of a “company”, and section 1 defines a company as one formed and registered under the Act. Where a UK company is the subsidiary of a parent incorporated abroad, whether it can hold its parent’s shares is a question for the law of the parent’s country rather than section 136.

Why does company law forbid it?

The prohibition sits alongside the general rule in section 658 that a limited company must not acquire its own shares except in accordance with Part 18 of the Act. A purported acquisition in breach of section 658 is void and is a criminal offence by the company and every officer in default. If a subsidiary could freely buy its parent’s shares, the group would in substance be buying its own shares with group money, without the solvency, funding and approval safeguards that apply to a buyback, and the parent’s directors would control votes attached to the parent’s own shares. Section 136 stops that route. For the lawful ways a company can hold or reacquire its own shares, see company share buybacks and treasury shares.

When can a subsidiary hold parent shares as trustee or personal representative?

Section 138 disapplies the prohibition where the subsidiary is concerned only as personal representative, or as trustee unless the holding company or a subsidiary of it is beneficially interested under the trust. A trust company within a group can therefore hold parent shares for outside beneficiaries without breaching section 136.

When deciding whether the group has a beneficial interest, section 138(2) tells you to ignore several types of interest:

• an interest held only by way of security for a transaction entered into in the ordinary course of a business that includes lending money;
• under section 139, a residual interest under a pension scheme or employees’ share scheme that has not vested in possession, such as the employer’s right to any surplus once all liabilities under the scheme are met;
• under section 140, an employer’s charge, lien or set off against a scheme member’s benefits to recover money the member owes the employer;
• the company’s rights as trustee, including rights to recover expenses, to be paid out of the trust property, and to be indemnified for liabilities incurred as trustee.

This is what allows a group company to act as trustee of an employee share trust holding parent shares, provided the group’s only interests fall within those disregarded categories.

What about a subsidiary that deals in securities?

Section 141 lifts the prohibition where the subsidiary holds the shares in the ordinary course of its business as an intermediary. To be an intermediary it must carry on a bona fide business of dealing in securities, be a member of or have access to a UK regulated market, and not carry on an excluded business. Excluded businesses include one consisting wholly or mainly of making or managing investments, one mainly providing services to connected persons, insurance business, managing or acting as trustee of a pension scheme, and operating or acting as trustee of a collective investment scheme.

Section 142 protects outsiders. If a dealer subsidiary acquired parent shares in breach of section 136, a person who in good faith agreed to acquire them for value and without notice of the breach takes good title, as if the subsidiary’s original acquisition had been valid. This exception is mainly relevant to banking and broking groups rather than owner managed businesses.

What if the shares were held before the prohibition applied?

Section 137 lets a body corporate continue as a member where it became a holder of the shares before the relevant date (1 July 1948 for a company registered in Great Britain, 1 April 1961 for Northern Ireland), or later in circumstances where the prohibition then in force did not apply. The common modern case is a company that already owned some shares in another company before that other company acquired control of it.

The protected holding comes with two conditions:

• No votes: while the prohibition would otherwise apply, the subsidiary has no right to vote those shares on a written resolution, at general meetings or at class meetings (section 137(4)).
• Bonus shares only: the company may validly allot it fully paid shares by way of capitalisation of reserves (section 137(3)), and those shares also carry no votes. Any other allotment to it, such as taking up a rights issue, falls back under section 136 and is void.

How does this work in practice?

Illustration only. Alpha Ltd owns 3% of the shares in Beta Ltd. Beta then buys all the shares in Alpha, so Alpha becomes Beta’s wholly owned subsidiary.

1. Alpha acquired its 3% before it was Beta’s subsidiary, so section 137 lets it remain a member.
2. From the moment Alpha becomes a subsidiary, it cannot vote the 3% at Beta’s meetings or on Beta’s written resolutions. Beta’s company secretary should exclude those shares when counting votes and when identifying eligible members for a written resolution.
3. If Beta later makes a bonus issue, Alpha can receive its bonus shares, again without votes.
4. If Beta offers new shares for cash to all members, Alpha cannot take them up. An allotment to Alpha would be void under section 136(1)(b).
5. If the group wants to tidy the position, Alpha can sell the 3% to an outside buyer, or Beta can consider whether a lawful route under Part 18, such as a buyback from Alpha, is available on the facts.

What mistakes come up most often?

• Reorganisations that issue parent shares into the group: a share for share exchange or hive up is drafted so that a subsidiary ends up as an allottee of parent shares. That allotment is void. See share for share exchanges for the tax side, but check the company law mechanics first.
• Using a nominee: holding through a nominee for the subsidiary is treated the same as the subsidiary holding directly (section 144). See nominee shareholders.
• Counting protected shares as votes: shares kept under section 137 still appear on the register but cannot vote.
• Assuming any trust is fine: the trustee exception fails if the parent or another group company has a beneficial interest beyond the disregarded categories.
• Leaving a void transfer on the register: if a void allotment or transfer has been entered in the register of members, the entry is wrong. Take advice on correcting it, using the process described in rectifying the register of members, and review anything that relied on it, such as votes counted or statements of capital filed.

Group structure questions often overlap with accounting classification. For how holdings are treated in the accounts, see subsidiary, associate or joint venture.

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Related Accountapedia entries

• Business relief on shares in a holding company
• Subsidiary audit exemption with a parent guarantee
• Can a child own shares in a company
• Accounting for a company purchase of own shares
• Can a parent accrue a dividend from its subsidiary

Sources

• legislation.gov.uk: Act 2006 c. 46, section 136
• legislation.gov.uk: Act 2006 c. 46, section 1159
• legislation.gov.uk: Act 2006 c. 46, section 144
• legislation.gov.uk: Act 2006 c. 46, section 143
• legislation.gov.uk: Act 2006 c. 46, section 1
• legislation.gov.uk: Act 2006 c. 46, section 658
• legislation.gov.uk: Act 2006 c. 46, section 138
• legislation.gov.uk: Act 2006 c. 46, section 139
• legislation.gov.uk: Act 2006 c. 46, section 140
• legislation.gov.uk: Act 2006 c. 46, section 141

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.