Investing cash held in your Company
We have seen a growing number of clients request our help with investing the profits held in their limited companies. They are typically presented with a number of options for handling profits, such as:
1)Distribute the profits as dividends.
2)Leave the profits in cash.
3)Use the profits to make a pension contribution.
4)Invest the money for long term capital growth
The problem with dividends and holding cash on deposit…
The first option is not always desirable for higher earners, expecially if it pushes them into a higher tax bracket. Dividends might be deemed particularly unattractive if income is not needed immediately to meet living expenses. As a result, some individuals choose to wait until their tax burden is reduced before taking up this option.
However, many are now fed up of having cash languishing in their company bank accounts that is earning next to no interest.
Make your cash work harder
Overall, therefore, it might be preferable to consider either making a pension contribution or investing some of this money in the name of the company for long term capital growth. This will, of course, depend on the company’s circumstances, objectives, time horizon and attitude to risk.
Strategy 1: An Investment Bond
Investment bonds have become particularly compelling structures when targeting capital growth within a company, largely due to their tax treatment. In effect, the bond is treated as a fixed asset of the company. They offer a vast array of investment choice that can be tailored to meet the appropriate attitude to risk and overall objectives of the company. They provide access to managed, general and specialist funds providing opportunities to invest in equities, property and fixed interest securities.
Example: Dr Owen directs £100,000 pa of private earnings through a limited company, Owen Healthcare Ltd. He owns 50% of the shares and his wife, Mrs Owen, owns the other 50%. They are both employed as Directors.
The Owens want to invest £50,000 for long term capital growth. Their aim is to build up a pot of money to help pay for their children’s school fees in ten years’ time. Following discussion, they opt to use an onshore investment bond. The underlying investment will ensure diversification across the asset classes and it also has additional controls to help reduce volatility.
Moving forward, the Owen’s can make adjustments to their underlying investments within the bond without triggering any tax charges. On encashment, there will be no further taxation on any gains because they will receive a tax credit for tax already paid by the life company.
Strategy 2: Pension Contributions from a Company
You can make pension contributions directly into a pension fund for you or another employee of the company and these should receive Corporation Tax relief in the year that they are paid. They should also be free from National Insurance which can make them a particularly tax efficient method of extraction; albeit one that ties the monies up until retirement. It is also important to consider what bearing these contributions will have on an individual’s Annual Allowance and Lifetime Allowance.
Example: Mr John Stones is the owner of Stones Ltd. His wife, Rita, is also a director of the business. They approached us because they wanted to make a pension contribution.
It was recommended that this be made in Rita’s name, due to concerns about the likelihood that John will breach the Lifetime Allowance in future years. A total of £20,000 was thus invested into a new pension for Rita. This amount was not deemed excessive in relation to the work Rita carries out as a director of the company.
An investment was selected that matched Rita’s Balanced risk profile, growth objective and long term investment time horizon. As a result, they were able to:
Save Corporation Tax
Pension contributions can be treated as an allowable business expense and offset against a company’s corporation tax bill.
Save National Insurance
Unlike salary, pension contributions are not subject to National Insurance. Thus any saving can be retained by the company.
The above also avoids boosting Dr Stones’ own pension wealth thus avoiding challenges that would otherwise arise relating to Annual Allowance and Lifetime Allowance Limits.
For individual help with Company Investing call us on 0203 6386 698 or email enquiry@lionmede.co.uk. We can then get in touch with you to arrange a free initial meeting.
The information in this article does not amount to personal advice. You are strongly advised to obtain specific, personal advice from an independent financial adviser about your own circumstances and not to rely on the information or comments in this article.