Investing retained profits

[IR35 Avoider]

My plan is to make the offshore holding company a shareholder of the contracting Ltd so when divis get paid out a percentage go to the offshore investment company. CT has already been paid on the contracting Ltd profits but the offshore investment company is not liable for CT so when the after tax profits go in there's no more tax to be paid on capital gains/rental income/equity/dividends etc.

So I can invest some money made by the Ltd without having to go up to the 28% CT bracket and have my Ltd become an investment company. But have an investment company specifically for that which is offshore and get's its investment capital in the form of after tax profits from my contracting Ltd.

I don't see another way around it, I don't want to put it into a pension fund and I've got an ISA but I intend to invest more than 7k a year. I don't see why I should have to pay higher bracket tax rates just because I want to invest the company profits - offshore it is, and if there are tax breaks involved well that's a bonus!

What exactly do you mean by off-shore company? I believe that the fact that a company is registered outside the UK is irrelevant in determining how much tax it pays in the UK. Its UK tax bill is determined by whether it has a physical presence here or is controlled from here. As it is your company, it will be controlled from here, so will pay full UK Corporation Tax. (I am not an accountant, and may be talking complete b*ll*cks.)

[proster]

But at some point you'll have to bring that money onshore when you want to spend it.. Assuming you're going to be a high rate tax payer until you retire, you'll be paying high rate tax on this money (income).

However, if this is set up as a loan from your uk ltd company to the OIC, then it remains an asset on the balance sheet.

When winding up your company after 3 years, you are entitled to some tapered tax relief on any value left in the company - which would ultimately be a cheaper way to bring the money onshore.

But I feel there's something still missing..

[Jog On]

My plan is to make the offshore holding company a shareholder of the contracting Ltd so when divis get paid out a percentage go to the offshore investment company. CT has already been paid on the contracting Ltd profits but the offshore investment company is not liable for CT so when the after tax profits go in there's no more tax to be paid on capital gains/rental income/equity/dividends etc.

So I can invest some money made by the Ltd without having to go up to the 28% CT bracket and have my Ltd become an investment company. But have an investment company specifically for that which is offshore and get's its investment capital in the form of after tax profits from my contracting Ltd.

I don't see another way around it, I don't want to put it into a pension fund and I've got an ISA but I intend to invest more than 7k a year. I don't see why I should have to pay higher bracket tax rates just because I want to invest the company profits - offshore it is, and if there are tax breaks involved well that's a bonus!

[proster]

That sounds like exactly the kind of thing I was considering..

If your limited company makes a loan to an offshore investment company and pays nominal interest (similar to a deposit on a business current account) then your OIC can make any investment it likes, e.g. property, etc..

The interest your limited company receives from the loan is, of course, taxable.

Any money (profits) you subsequently choose to bring "onshore" from your OIC is also taxable.

Not sure about the legality tho.. anyone?

[Jog On]

I think you're OK to invest a bit - according to my accountant you are anyway. Companies should invest something for a rainy day. From what I understand if you invest over a certain amount of your profits that makes you an investment company - what that amount is I'd love to know.

Would be great if an accountant could clarify this or is it another wooly issue like the whole 'tax avoidance/non compliance (compliance with what?)' thing.

I definitely am going to invest my company's money, whether I do it as a company or as an individual is down to this. I think an offshore tax haven investment company sounds like the answer - Tesco seem to be doing pretty well for it - and they manage to stay mates with Tony Blair as well!

[ASB]

Is there an official threshold that defines becoming an investment company?

What about forming an offshore investment company that is a shareholder of the contracting Ltd? Isn't that what Tesco do?

Can I do all the investing through that company and pay 0 tax?

Threshold, no. Talk to your accountants or take advice from HMRC helpline.

What works for test and what works for you may be different things....

Regarding the 0 tax, remember that the retained funds have already been subject to CT. You then invest these, any growth will ultimately simply become the companys income when the asset is disposed of, also it may be the case that periodic revalutations should take place which will crystallise any profit/loss. The same is true of income generated. Thus all the return is going to be taxed.

Now, you may be in a position where you can extract as divident some/all of those funds with no further tax to pay. i.e. you don't go into higher rate.

If you then invest these funds you will at least get your CGT allowances on some/all the gain. Equally you could get some of them into tax free wrappers. This has to put you ahead of the game.

But, where extracting the funds would make you a higher rate taxpayer it is more complex. Here you may be able to justifiy the company investing - because of the additional tax to pay should you extract the funds. However you are going to need to extract the funds from the company some day, this then means you may still fall into higher rate tax at that point (or may not).

There are other options, for example you could look at a self select sipp and make contributions into that. This also has the advantage of reducing CT liabilities since it is a chargeable expense (normally).

There is no magic answer that is right, it depends on circumstances and attitudes, but if you are in a position where you have used all your basic rate allowances and still have excess funds accumulating then investing those retained funds is probably better than leaving them on deposit, but the income/growth they ultimately generate is taxable in the company (in just the same way as the deposit income is).

[Zorba]

Bugger. I bought an investment with some of my company's money. Might have to sell it if I am indeed risking the nature of my business.

[Jog On]

Is there an official threshold that defines becoming an investment company?

What about forming an offshore investment company that is a shareholder of the contracting Ltd? Isn't that what Tesco do?

Can I do all the investing through that company and pay 0 tax?

[crack_ho]

If Interest rates on Business (Reserve) Accounts are lower than Inflation then you are not risk free as your money is loosing value. So you must be able to justify buying a nice corporate bond or at least a gilt fund surely?

[tim123]

You invest it in something completely risk free.

If you want to invest in something risky, you either have to have a genuine business reason for doing so (such as a need to hedge currency) or you extract the money from the company in the normal way, and take the risk personally.

HTH

tim

[Burdock]

what do other people do with retained profits?

keep for rainy day/on the bench, spend on company marketing, invest elsewhere?

[tim123]

Yep that's exactly right.

You can, but you shouldn't.

tim

[ASB]

Am I allowed to invest profits held in my company accounts in shares and unit trusts? If so which companies allow me to set up a trading account as a ltd company?

Yes, don't know.

But it may not be a good idea (unless you are committed to making a loss). For a start there is the lack of CGT allowances, secondly there is risk that you may ultimatley lose your trading company status becoming an investment compnay and taxed accordingly.

[crack_ho]

Am I allowed to invest profits held in my company accounts in shares and unit trusts? If so which companies allow me to set up a trading account as a ltd company?