Investing company assets in OEICs/Unit Trusts

[tim123]

Stick it offshore - gross rollup, off the company books,

How does it come off the company books if it hasn't been legitimately spent on a deductable item?

tim

[dude69]

How does it come off the company books if it hasn't been legitimately spent on a deductable item?

tim

He said in the event that you moved overseas you could get it out, but it's still company money, and the company is still in the UK, and still surely chargeable to CT at 22% (by that point).

I'm not entirely clear what the point of hiding it offshore given that the profit has to be crystalised one day - sure you can avoid CT for years, but you end up paying it in the end.

[dude69]

The figure was exemplary. The point was that you should be able to generate the same return whether the funds are company owned or personal.

What is key is whether you are going to be able to get the cash out as a capital distribution.

Even if you pay higher rate tax on it there is a case to pay enough dividends to ensure you can use your tax free allowances at least.

A relevant point. Especially things like the ISA, of £14.4k/year for a married couple, which is quite important to utilise IMO, and clearly obviates some part of the 25% tax charge. The question is basically what is the value of an ISA. A cash ISA paying 6% saves 2.4% of the total amount invested for a higher rate tax payer EACH YEAR.

The relative difference is in tax is 25% income tax versus 10% entrepeneur's capital gains tax. I.e. 0.75x versus 0.9x. Hence Capital Gains Route = Income Tax Route * 1.2

But if that money is going straight into a cash ISA, then at whichever point you pay it out, it will be sheltered from tax.

So at some point

0.9x * (1+(IR*.6))^n < 0.75x * (1+IR)^n
1.2 * (1+(IR*.6))^n < (1+IR)^n

If IR is 6%, then
1.2 * 1.036^n < 1.06^n
1.2 < 1.023166023 ^ n
n > 7.96

So after 8 years, the 25% tax-paid money going into the cash ISA has beaten the 10% unsheltered money. In reality, it would happen quicker, because the money inside the company pending capital distribution would not get the same level of interest as a private investor could earn, so it would underperform there.

So it's a no-brainer for everyone to ensure their Cash ISA is topped up, even out of higher rate tax money.

The shares ISA is far less clear cut, because none of the leading funds of last year even have a yield, so income tax avoidance is less important. CGT is perhaps less of an issue now the rate has fallen to 18%.

I actually have outside income, so I don't need to spend the company cash - I can currently fund my two ISAs to the £7k max and all my living expenses, foreign holidays, etc., without paying higher rate tax.

The question for me then is my CGT allowance.

I currently am nervous of the stock market and don't invest beyond the £14k/year, keeping most of my liquid wealth in cash.

I am not therefore using my CGT allowance at all, although I may get round to it at some point. But it is perhaps likely that all the company's share gains would fall inside my allowance.

Hence:

£x in company,
or £0.75x to me

Assuming 8% growth:
Keep it in company for 5 years, grows at (78% * 8%) (22% CT rate), then pay out 0.9x of future value - call it 6.2% growth per annum after corporation tax and slight loss in yield due to possibility of non-deductible losses
or pay it to me, receive 8%

Hence
0.9x * 1.06^n for money in company
0.75x * 1.08^n for money in private hands

For when it becomes better to pay out a dividend the equation is:

0.75x * 1.08^n > 0.9x * 1.06^n
1.08^n > 1.2 * 1.06^n
hence n = log(1.2, 1.08/1.06)

= 9.75 years
Ten years.

In other words, if you anticipate winding things up inside 10 years, it would be better to invest in the company, even if you have unutilised CGT allowance. This 10 years is different from the 8 years for a cash ISA - for paying out as income with 25% IT to be better (and assuming unutilised personal CGT allowance) the money has to spend 10 years INSIDE the company, whereas the cash ISA is guaranteed to have a higher future value, and this point is reached eight years after you first had the opportunity to invest money in your cash ISA.

There is obviously a risk in doing this though, because the CGT relief might not be available, and you might incur higher investment costs. But still, any thing up to five years seems sensible.

And of course if you've really got a lot of money, the CGT allowance is no longer useful, and beyond that, proper personal CGT allowance utilisation costs time and money - simply declaring an annual profit on CT return is much simpler than painstakingly crystalising gains and asset-swapping with spouse in order to ensure that you use your allowance each year.

In essence, it would appear that you should invest your full £7,200 in an ISA each year, and beyond this corporate investing is reasonably attractive, but not overwhelmingly compelling.

[ASB]

I didn't need so many sums

It seems to me that the upside through the company doing it is generally fairly limited - and it all hinges on getting relief on the funds which as you note is risky in itself.

However, it does seem that your circumstances might merit it.

[Fred Bloggs]

Fair point but.....

A fair point for the young guy who at 25 y.o. can't imagine investing £100k for the next 30 years but..... For the majority of us (and really I think the young guy should seriously reconsider putting at least some of that cash pile into a SIPP) funding a SIPP from company contributions is the "Gold Standard" for getting your money out of the company. You just need a longer term game plan. I'm now >50 and I can take 25% of the SIPP contribution straight away as tax free cash and pop it into an ISA every year, as can my wife.

The plan is then to draw down the maximum amount possible from the SIPP every year and pop that into ISA's as well. Depending on investement performance of the SIPP, this strategy will furnsih me with some very fat ISA's and probably a very small SIPP at age 75. The advantages of this longer term strategy are obvious, at least to me.

For the record, I use Hargreaves Lansdown. Who, incidentally, you CAN appoint to be your Ltd company's stockbroker should you wish. I prefer the SIPP/ISA route to cash accumulation myself.

[dude69]

For the record, I use Hargreaves Lansdown. Who, incidentally, you CAN appoint to be your Ltd company's stockbroker should you wish. I prefer the SIPP/ISA route to cash accumulation myself.

I already put £6k a year into my HL SIPP. I regard this as sufficient for a pension that I won't get access to for 30 years, by which time I anticipate being considerably wealthy anyway.

[ASB]

I already put £6k a year into my HL SIPP. I regard this as sufficient for a pension that I won't get access to for 30 years, by which time I anticipate being considerably wealthy anyway.

I know you obviously have other well formed plans but the figures get worrying.

6k p.a. @ 25 will give you the grand total of 22.5k income at age 60 (using the standard assumptions). Wait till 30 and it goes up to 8.5k. Thats a big chunk out of most peoples income.

[moorfield]

A fair point for the young guy who at 25 y.o. can't imagine investing £100k for the next 30 years but..... For the majority of us (and really I think the young guy should seriously reconsider putting at least some of that cash pile into a SIPP) funding a SIPP from company contributions is the "Gold Standard" for getting your money out of the company. You just need a longer term game plan. I'm now >50 and I can take 25% of the SIPP contribution straight away as tax free cash and pop it into an ISA every year, as can my wife.

Agree with that. Personally I think the SIPP route is a no brainer.

So it's a no-brainer for everyone to ensure their Cash ISA is topped up, even out of higher rate tax money.

Nope. If you have an offset mortgage your cash is better off in there.

[glashIFA@Paramount]

He said in the event that you moved overseas you could get it out, but it's still company money, and the company is still in the UK, and still surely chargeable to CT at 22% (by that point).

I'm not entirely clear what the point of hiding it offshore given that the profit has to be crystalised one day - sure you can avoid CT for years, but you end up paying it in the end.

You're not hiding it offshore - you're investing it offshore. Virtually tax free growth, deferred CT is better than paying it on an ongoing basis. Create a loss and bring the capital back then. Bring it back, pay the CT and then throw it into a pension and get relief. Money remains accessible till you put it in a pension, just in case its needed. Lots of options to consider.

[ASB]

You're not hiding it offshore - you're investing it offshore. Virtually tax free growth, deferred CT is better than paying it on an ongoing basis. Create a loss and bring the capital back then. Bring it back, pay the CT and then throw it into a pension and get relief. Money remains accessible till you put it in a pension, just in case its needed. Lots of options to consider.

Hasn't the "create a loss approach" just been defeated at SC or is that for a different type of capital loss ?