Trading subsidiaries of charities

Produced by Tolley in association with Speechly Bircham LLP

The following Trusts and Inheritance Tax guidance note Produced by Tolley in association with Speechly Bircham LLP provides comprehensive and up to date tax information covering:

  • Trading subsidiaries of charities
  • Introduction to trading subsidiaries
  • Setting up a trading subsidiary
  • Financing the trading subsidiary
  • Investment by the charity
  • Donation from supporters of the charity
  • Retention of profits in the trading subsidiary
  • Loans from banks or other investors
  • Use of the charity’s assets
  • Payments from the subsidiary to the charity
  • More...

Trading subsidiaries of charities

Introduction to trading subsidiaries

A 'trading subsidiary' is a company owned and controlled by a charity, or occasionally several charities, which has been incorporated in order to carry on a trade or business which:

  1. the charity cannot itself carry on due to constitutional restrictions or concerns about business risk and potential liabilities, and / or

  2. the charity cannot carry on in a tax-efficient manner

A trading subsidiary is usually set up to generate income for the charity or charities, as the subsidiary does not have the restrictions to its trading activities that charities have.

A trading subsidiary can be used to:

  1. carry out non-primary purposes trading beyond the limits of the small scale exemption (see the Tax treatment of the charity guidance note)

  2. protect a charity’s assets from the risks of trading

If the subsidiary company gives all or part of its profits to the charity (in place of a dividend) then it will not pay tax on those profits, see the Gifting cash and assets to charity guidance note.

Trading subsidiaries are not cheap to run and generate additional bureaucracy and complexity and so should not be created without proper consideration of their merits and disadvantages.

Setting up a trading subsidiary

If a charity wants to set up a trading subsidiary it will need to:

  1. create a company

  2. provide it with trading capital (see below)

  3. consider how the charity's assets can be made available to the company (see below)

  4. ensure that the company gives profits, which would otherwise be taxed, to the charity (see below)

Financing the trading subsidiary

Financing or investing in the subsidiary raises tax and charity law issues. To avoid criticism, charities should consider taking advice on this.

There are several possible ways to finance the subsidiary.

Investment by the charity

A trading subsidiary's funding is usually provided by share or loan capital from the charity. There are special rules that apply to charities when they invest their funds in a trading subsidiary.

The provision of share or

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