Can my limited company invest in shares? The simple truth.
Making strategic capital decisions is the sign of a maturing entrepreneur and the sign of a business that is ticking over nicely. Getting your capital to earn above inflation rate returns is a very good step towards financial independence for you and/or your business. You might be wondering if your limited company can invest in shares.
We help with the simple truth here to address any questions you may have around this phase. We have put together an overview of scenarios, taxation elements, and what benefits you can expect from purchasing investments as a Limited company.
Can my limited company invest in shares and funds?
The simple answer is yes. As explained in our article Sole Trader to Limited Company – How to Make the Transition, a limited company is created by registering a separate legal entity in the form of an incorporated company. It has its own registration number with the Registrar of Companies and with the HMRC. As it is an independent legal entity, it is entitled to purchase property (an asset) just as you are entitled to as an independent legal entity. The decision would obviously have to be ratified by the Directors in accordance with the company policies. If your burgeoning company has Shareholders as well, then they will have to be part of the approval process as well.
Taxation considerations when your limited company is investing
As with all business or financial decisions and transactions, there is a tax factor to consider. The two examples below will help illuminate the tax factors that relate to your limited company investing in shares and will need financial management:
Income that is generated from your company’s investment income will be 25% based on current taxation rates. However, it increases to 40% if the profit remains in the company for more than 18 months. On the other hand, however, if you withdraw the profit from the limited company into your personal account, then the tax rate shoots up from 25% to 52% tax on that specific income. To view that in numbers, see the example below:
Amount invested into shares by your company = €50, 000
Income generated from the invest in 1 year = €5, 000
Corporation tax = €1, 250
Personal tax = €3, 750*52% = €1, 950
Corporation tax surcharge €3, 750*15% (15+25=40%)= €562
Unlike other purchases, profits cannot have the cost of the company’s investments written off against them. Income generated for capital reserves will be subject to 12.5% Corporation tax, which means that you have already paid corporation tax on the amount that you have in the company.
Income generated for 1 year = €100, 000
Salary for the same years = €60, 000
Expenses incurred during that year = €10, 000
Investments made within the same year = €30, 000
The profit calculation would be €100, 000-€60, 000-€10, 000 = €30, 000
The Corporation tax will therefore be €30, 000*12.5% = €3, 750
As with all assets, any disposal or transfer Transferring Assets From Sole Trader to a Limited Companywill attract Capital Gains tax. Therefore, in the instance of your company selling its investment, any profit the company makes from that sale will be subject to Capital Gains tax. If in the future there is a liquidation of your company and the same money if it is still within the company, then there might be a further charge to capital gains on those funds.
The advantage of your limited company investing in shares
Deciding to invest in shares via your limited company comes has two main advantages:
Advantage #1: Building up capital reserves is, by far, much easier to do if you keep the funds within the company versus extracting the funds in your personal account. This is due to the Corporation tax being much lower than Income tax.