Company Investments

[morphman]

Hi,

I own a limited company, and would like to invest some of the company profits. I am mainly thinking of trading my company capital against the stock market, with a view to getting a better interest rate than a deposit account. I am aware of risk etc...

Couple of Q's though.

1. Are any losses sustained through investment subject to tax, or just counted as a pre-tax expense.

2. Can the investment be counted as an expense (until its cased in of course), and therefore not subject to corporation tax until it is back in the company profits. (Or do stocks count as taxable assets).

3. If I am investing on behalf of my company, can I charge expenses?, or better still, can I nominate someone to invest for me (ie. my dependents), and pay them investment fees as a company expense (ie non taxable)?

Any other advice would be appreciated.

[partimer]

not worth the aggro

You can do it but it wouldn't be worth the trouble with your current set up.
Unless you jack in contracting and reclassify your business to share trading then no. If you think about it, you are particularly gambling. You are not an investment house.

[Taxman]

Hi,

I own a limited company, and would like to invest some of the company profits. I am mainly thinking of trading my company capital against the stock market, with a view to getting a better interest rate than a deposit account. I am aware of risk etc...

Couple of Q's though.

1. Are any losses sustained through investment subject to tax, or just counted as a pre-tax expense.

2. Can the investment be counted as an expense (until its cased in of course), and therefore not subject to corporation tax until it is back in the company profits. (Or do stocks count as taxable assets).

3. If I am investing on behalf of my company, can I charge expenses?, or better still, can I nominate someone to invest for me (ie. my dependents), and pay them investment fees as a company expense (ie non taxable)?

Any other advice would be appreciated.

As an accountant specialising in Contractors, I am often asked similar questions and largely have to agree with the previous response that it isn't the best idea.

A major factor to be considered is that companies don't have annual CGT exemptions. Contrast that to individuals who have an annual exemption that is currently £8,500. A married couple can benefit from both their exemptions by buying shares in joint names and therefore having an overall exemption of £17,000.

Individuals only pay CGT on the amount of the gains that exceed their exemption. The gains are taxed as the top slice of the individual's income and subject to the same rates as other income, ie gains that fall within the basic rate threshold will be taxed at 22% and gains that exceed the higher rate threshold will be taxed at 40%.

A company has no exemption and therefore pays CGT (in the form of corporation tax) on all the profits (after the deduction of indexation allowances which are intended to remove the inflationary element from the capital gain). In practice, this will normally mean 19% tax for a contractor company, but if the investments were to become more than incidental to the main trade of the business, the company could be reclassified as an investment company and be charged 30%.

Another factor you have to consider is that you will no doubt ultimately wish to extract the profits or the shares from the company. There is nothing to prevent that, but any transfer of the shares would be treated as a disposal for CGT purposes on which the company would be taxed according to the market value of the shares, regardless of the price actually paid. This could incur a substantial cost if the investments have appreciably grown in value over the years.

To answer your spcific questions:

1) Losses would only be allowable against other capital gains and cannot be relieved against trading profits.

2) No relief for the investment and so you would still pay corporation tax as normal on trading profits (and indeed on any other capital gains).

3) Buying and selling costs like these would be treated as capital costs and ultimately reduce the capital gain,but there would be no effect on the trading profits. The expenses would also have to be reasonable. If they were considered to be excessive and not commensurate with the work actually done in making the investments, the cost could be refused by the Inland Revenue in computing the ultimate capital gain.

My advice? Not so much of a problem if you are only talking about short-term investments that you will cash in annually with relatively small profits, but not so worthwhile if you intend to retain the investments long term and make much more substantial profits -not to mention the effect it could have on your cash-flow.

Hope this helps!

[morphman]

Thanks for the informative comments.

Not really what I wanted to hear, but surely our chancellor has some way of encouraging corporate investment. He wants companies to blossom, not individual directors personal wealth.

What about profits that are already in the company, and I have already paid corporation tax on? Surely its better to invest those profits rather than leave them in a poxy 3% deposit account.

[Taxman]

Thanks for the informative comments.

Not really what I wanted to hear, but surely our chancellor has some way of encouraging corporate investment. He wants companies to blossom, not individual directors personal wealth.

What about profits that are already in the company, and I have already paid corporation tax on? Surely its better to invest those profits rather than leave them in a poxy 3% deposit account.

Whilst the funds remain in the company, it obviously makes sense to maximise the investment return thereon, but in CGT terms you're better off owning shares individually.

I don't think Gogs Boy would share your ideas of corporate investment. You are after all a one-man company that - with respect - isn't exactly going to be providing jobs for the masses in the unemployment blackspots.

Mind you, Gogs doesn't exactly do the best job of that either...

[Bradley]

Re;Taper

As an accountant specialising in Contractors, I am often asked similar questions and largely have to agree with the previous response that it isn't the best idea.

A major factor to be considered is that companies don't have annual CGT exemptions. Contrast that to individuals who have an annual exemption that is currently £8,500. A married couple can benefit from both their exemptions by buying shares in joint names and therefore having an overall exemption of £17,000.

Best buying them individually and not in joint ownership for CGT and inheritance tax purposes,

Individuals only pay CGT on the amount of the gains that exceed their exemption. The gains are taxed as the top slice of the individual's income and subject to the same rates as other income, ie gains that fall within the basic rate threshold will be taxed at 22% and gains that exceed the higher rate threshold will be taxed at 40%.

A company has no exemption and therefore pays CGT (in the form of corporation tax) on all the profits (after the deduction of indexation allowances which are intended to remove the inflationary element from the capital gain). In practice, this will normally mean 19% tax for a contractor company, but if the investments were to become more than incidental to the main trade of the business, the company could be reclassified as an investment company and be charged 30%.

Another factor you have to consider is that you will no doubt ultimately wish to extract the profits or the shares from the company. There is nothing to prevent that, but any transfer of the shares would be treated as a disposal for CGT purposes on which the company would be taxed according to the market value of the shares, regardless of the price actually paid. This could incur a substantial cost if the investments have appreciably grown in value over the years.

You don't have to do that. What's better a close investment holding company at 30% CT on income or a personally held investment with the income getting taxed at 40%? Especially if your not ever going to need the capital?

To answer your spcific questions:

1) Losses would only be allowable against other capital gains and cannot be relieved against trading profits.

Can in certain circumstances ...

2) No relief for the investment and so you would still pay corporation tax as normal on trading profits (and indeed on any other capital gains).

3) Buying and selling costs like these would be treated as capital costs and ultimately reduce the capital gain,but there would be no effect on the trading profits. The expenses would also have to be reasonable. If they were considered to be excessive and not commensurate with the work actually done in making the investments, the cost could be refused by the Inland Revenue in computing the ultimate capital gain.

Companies are no longer investment companies but companies carrying on an investment business and the regime for claiming expenses is far less stringent. I would check again Taxman.

My advice? Not so much of a problem if you are only talking about short-term investments that you will cash in annually with relatively small profits, but not so worthwhile if you intend to retain the investments long term and make much more substantial profits -not to mention the effect it could have on your cash-flow.

Hope this helps!

Also think about the effect on taper relief if you ever liquidate the company. Companies carrying on an investment business are likely to lose the 75% business rate.

[Taxman]

Best buying them individually and not in joint ownership for CGT and inheritance tax purposes,
You don't have to do that. What's better a close investment holding company at 30% CT on income or a personally held investment with the income getting taxed at 40%? Especially if your not ever going to need the capital?

Can in certain circumstances ...

Companies are no longer investment companies but companies carrying on an investment business and the regime for claiming expenses is far less stringent. I would check again Taxman.


Also think about the effect on taper relief if you ever liquidate the company. Companies carrying on an investment business are likely to lose the 75% business rate.

I think I'm missing your first point. I was referring to married couples and there are no CGT or IHT implications for transfers between spouses. I wasn't necessarily meaning the shares needed to be held jointly either of course - ie a separate shareholing could be held by each spouse. The point was that a married couple can take advantage of 2 annual CGT exemptions.

On your second point, I agree completely, but we're talking at cross purposes. I was looking at it from the CGT viewpoint. It makes no sense to pay 30% CT on a capital gain when an individual (or 2 married individuals) could make the gain with less or no CGT.

If the capital won't ever be required, it would presumably make more sense to put it into a pension fund anyway.

You've missed my point when you say ' the regime for claiming expenses is far less stringent'... If you were to pay a family member an amount that was clearly far more than is warranted for their supposed investment management services, the Revenue would have every right to refuse tax relief.