• Visitors can check out the Forum FAQ by clicking this link. You have to register before you can post: click the REGISTER link above to proceed. To start viewing messages, select the forum that you want to visit from the selection below. View our Forum Privacy Policy.
  • Want to receive the latest contracting news and advice straight to your inbox? Sign up to the ContractorUK newsletter here. Every sign up will also be entered into a draw to WIN £100 Amazon vouchers!

Investing company assets in OEICs/Unit Trusts

Collapse
X
  •  
  • Filter
  • Time
  • Show
Clear All
new posts

    Investing company assets in OEICs/Unit Trusts

    I have never seen this discussed, other than in dismissive terms of 'it's not a very good idea, don't bother'.

    Not sure why.

    Some of us are unwilling to pay Higher Rate tax, and hence our company's have large pools of cash, waiting for the day that we jack it all in, and can extract the money in a tax-efficient manner.

    I have heard it said that you should avoid investing, lest your company be classed as an Investment Company. Investment Companies are not entitled to Small Companies Corporation Tax relief. Yet the HMRC manuals say clearly

    An 'investment company' within old ICTA88/S130 (up to 31 March 2004) is any company:
    whose business consists wholly or mainly in the making of investments,
    and
    the principal part of whose income is derived from those investments

    see also http://www.hmrc.gov.uk/manuals/svmanual/svm27570.htm and others
    So if you are contracting, then it is in no way possible that your business would consist mainly of making investments. And if you stop contracting for a few weeks, then your business is still principally contracting, despite the brief lapse. But if you jack it all in for good, then you liquidate your investments and wind up the company.

    There isn't really any way that you could ever become an 'investment company', and thus pay higher CT.

    The only other reason I have seen is that you could lose the entitlement to business asset taper relief. This is of course no longer relevant, but we do now have "capital gains tax entrepreneurs' relief"

    http://www.hm-treasury.gov.uk/newsro...ent_240108.cfm

    "It will also be available to individuals disposing of shares in a trading company, provided that the individual is an officer or employee of the company and takes a minimum 5 per cent stake in the business."

    This is substantially the same as BATR: , 'a trading company' was defined as

    "a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities, see definition of "trading activities" below and CG17952c.

    On investment:

    'Normally, making an investment that yields investment income would not count as a trading activity. However, there are a number of circumstances where such activities could be undertaken in the course of, or for the purposes of, a company's trade. An investment may be so closely related to the conduct of a trade that it effectively forms an integral part of the trade. For example, a travel agent may be required to keep a fixed level of cash on deposit for bonding requirements. Or a company might receive a large payment, perhaps from selling a shareholding or on the completion of a major contract, and earmark the funds for some particular trade purposes, such as to meet some demonstrable trading liability or expand the trade in the near future.

    The short-term lodgement of such surplus funds, for example in an interest-bearing deposit account or in bonds or equities, could count as a trading activity. Alternatively, the company may intend distributing the monies received to its members. Depending on the facts, temporarily investing such funds until they can be distributed could count as being an activity undertaken for the purposes of the company's trade, since paying out the profits generated by a trade can count as a trading activity. This would be the case, for example, where the payment of an annual dividend depended on a meeting of the company's shareholders.

    However, the long term retention of significant cash generated from trading activities may amount to an investment activity. Factors to consider include the present and future cash flow requirements of the business , the nature of the underlying investments used as a lodgement for the funds, the extent to which these investments are managed and whether the funds have been ear-marked for a particular use in the trading activity.
    '


    So in this context, retaining cash for tax avoidance and investing in equities and so on, is non-trading.

    This is not necessarily a problem, the requirement is that the activities are not substantial. This is laid out at

    http://www.hmrc.gov.uk/manuals/cg1manual/CG17953p.htm

    Most companies and groups will have some activities that are not trading activities. The legislation provides that such companies and groups still count as trading if their activities "... do not include to a substantial extent activities other than trading activities". The phrase "substantial extent" is used in various parts of the TCGA92 to provide some flexibility in interpreting a provision without opening the door to widespread abuse. Substantial in this context means more than 20%.

    How should a company's non-trading activities be measured to assess whether they are substantial? Some or all of the following are among the measures that might be taken into account in reviewing a particular company's status.

    Income from non-trading activities.

    For example, a company may have a trade but also let an investment property. If the company's receipts from the letting are substantial in comparison to its combined trading and letting receipts then, on this measure in isolation, the company would probably not be a trading company.


    The asset base of the company.

    If the value of a company's non-trading assets is substantial in comparison with its total assets then again, on this measure, this could point towards it not being a trading company. If a company retains an asset it previously used, but no longer uses, for the purposes of its trade, this may not be a trading activity (but see below regarding surplus trading premises). In some cases it might be appropriate to take account of intangible assets (e.g. goodwill) that are not shown on a balance sheet in considering a company's assets. Current market value and amounts given by way of consideration for assets may both be appropriate measures of the relative extents of a company's trading and other activities. Which measure is appropriate will depend on the facts in each case.

    Expenses incurred, or time spent, by officers and employees of the company in undertaking its activities.


    For example, if a substantial proportion of the expenses of a company were to be incurred on non-trading activities then, on this measure, the company would not be a trading company. Or a company may devote a substantial amount of its staff resources, by time or costs incurred, to non-trading activities.

    The company's history.

    For example, at a particular instant certain receipts may be substantial compared to total receipts but, if looked at on a longer timescale, they may not be substantial compared to other receipts over that longer period. Looked at in this context, therefore, a company might be able to show that it was a trading company over a period, even where that period may have included particular points in time when, for example, non-trade receipts amounted to a substantial proportion of total receipts.

    It may be that some indicators point in one direction and others the opposite way. You should weigh up the impact of each of the measures in the context of an individual case. If you are unable to agree the status of a particular company for a period then the issue could be established only as a question of fact before the Commissioners.


    Investing company profits in the stock market is highly unlikely to occupy signficant time. Earning more than 20% of trading profits through non-trading activities could potentially be more of a problem. But if your company is making £100k/year trading profit, then £20k profit implies fairly substantial investments, so it's not too bad.

    The biggest issue would appear to be non-trading assets being substantial relative to trading assets. But appears to be the case whether your assets are invested or simply on deposit. So this is not a warning against investing, as much as it is a danger sign about keeping cash in the company and expecting to get BATR.

    Does anyone have any experience of this latter point? I know SJD have/had a pee-taking scheme where they encourage you to retain all cash above £30k in the company account and use BATR after 3 years. I don't see that the retained cash has any trading purpose (see the section in bold above), when your annual investment budget amounts to a few books and a PC. So how can these 10%-taxed distributions be a business asset?

    Has anyone taken advantage of BATR?

    #2
    Originally posted by dude69 View Post

    Some of us are unwilling to pay Higher Rate tax, and hence our company's have large pools of cash, waiting for the day that we jack it all in, and can extract the money in a tax-efficient manner.
    So why not just invest into funds via a pension/SIPP ?

    Take 25% tax free at 55. Draw out the rest at basic rate.

    You'll save yourself a whole heap of investment company hassle that way.

    Comment


      #3
      Originally posted by moorfield View Post
      So why not just invest into funds via a pension/SIPP ?

      Take 25% tax free at 55. Draw out the rest at basic rate.
      I'm 25. I don't want to tie up £100k for 30 years

      Comment


        #4
        Originally posted by moorfield View Post
        So why not just invest into funds via a pension/SIPP ?

        Take 25% tax free at 55. Draw out the rest at basic rate.

        You'll save yourself a whole heap of investment company hassle that way.
        I stay away from pensions, whilst there is some tax relief, the enforced purchase of an annuity pees me off. I invest in unit and investment trusts and so will benefit from the increased value of the asset and income, whereas the income from a pension is usually fixed or very limited increases.
        "The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance." Cicero

        Comment


          #5
          Originally posted by Waldorf View Post
          I stay away from pensions, whilst there is some tax relief, the enforced purchase of an annuity pees me off. I invest in unit and investment trusts and so will benefit from the increased value of the asset and income, whereas the income from a pension is usually fixed or very limited increases.
          You can do income drawdown until you are 75, 20 years. About 7% of fund value max if you retire at 55.

          Comment


            #6
            Originally posted by dude69 View Post
            You can do income drawdown until you are 75, 20 years. About 7% of fund value max if you retire at 55.
            This is still of limited value, the tax relief does not persuade me, I am sticking with my own managed investments. I am considering doing some of these through my company in future through.
            "The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance." Cicero

            Comment


              #7
              It is perfectly reasonable to invest the remaining company funds. Provided you are trading you will not get classed as an investment company (or at least are very unlikely to). What you are losing is the CGT allowance. How much of a penalty this is depends on how sucessful you are.

              Assume you have 20k left in the company and you manage to make a return of 10% P.A. On this after 5 years it is 29,282

              The 9282 is taxed at 20% (yes I know it's gone up now) gives 27425.6 for distribution. So if you are not a higher rate taxpayer then there is no more to pay, otherwise you receive 20568.

              In the event that you had paid the higher rate tax you would have received 15k to start with. On the same figures at the end of the 5 years you would have had 21961. However, some tax would have need to be paid on the gain since some of it would likely be income - but you are likely to be ahead..

              Equally if the sums involved were higher CGT might come into play - but this can usually be mitigated by ensuring that all pep type allowances are used and bed and breakfast as necessary (though the rules here do mean you have to make some changes). Some of the upcoming changes might improve the CGT position, equally they could make it worse.

              In my view retaining company funds and investing them is only likely to be better if you are pretty sure that you will not be a higher rate taxpayer when you withdraw them - or you can get them out as capital.

              However it is also skewed by whether the individual is paying CGT. If the individual is paying CGT then this will tend to make the corporate route more attractive (although the individual might want to consider whether they could arrange things better to reduce the CGT liability).

              Ultimately if you are thinking of have more than 100k in funds and the individual has no scope for mitigating the potential CGT then the corporate route may be slightly better, but you will need to work through all your own scenarios to decide.

              Comment


                #8
                Originally posted by dude69 View Post
                Does anyone have any experience of this latter point? I know SJD have/had a pee-taking scheme where they encourage you to retain all cash above £30k in the company account and use BATR after 3 years. I don't see that the retained cash has any trading purpose (see the section in bold above), when your annual investment budget amounts to a few books and a PC. So how can these 10%-taxed distributions be a business asset?

                Has anyone taken advantage of BATR?
                I assume you relate to ESC16?

                I think we had something like 70k cash on the books and about 10k of other assets. Didn't have a problem.

                Comment


                  #9
                  Where would you purchase the funds in a companies names?
                  I'm sure none of the fund supermarkets would allow it so do you have to purchase them direct? If so then you are walloped with a large initial fee of 5% or thereabouts plus no chance of getting your mitts on any renewal commission.

                  Comment


                    #10
                    Originally posted by crack_ho View Post
                    Where would you purchase the funds in a companies names?
                    Most likely in order to maximise returns pending taking advantage of enterepeneur's capital gains tax relief. 10% tax via capital distribution vs. 25% as a dividend.

                    I'm sure none of the fund supermarkets would allow it so do you have to purchase them direct? If so then you are walloped with a large initial fee of 5% or thereabouts plus no chance of getting your mitts on any renewal commission.
                    Good question. I don't think you can access Hargreaves Lansdown.

                    Depending on the investment size a fees-based execution-only IFA might be the cheapest. Set it up to get the commission rebated and upfront fee waived. IFAs can operate in this manner if you wish.

                    Potentially might be able to deal with http://www.cofunds.co.uk as well

                    I'm sure something can be arranged

                    Comment

                    Working...
                    X