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:
Example: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 OR 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.
Example: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 Company will 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 sharesDeciding 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. Advantage #2: In addition to corporate tax being lower than personal income tax, there is an additional tax benefit; namely, the tax rate on income relating specifically to investments is also lower. The corporation tax on investments would be 25% plus 15% (40%), and the personal income tax on investments would be 52%.
Next steps if your limited company wants to invest in sharesIf you read our articles regularly, you will see that we often advise that professional specialists should always be involved in the finances of your business. We again advise of it in this instance. Discuss your options with your accountant or accounting services and carefully weigh up the implications, not only the tax implications. The short-term company cash availability needs to be strategically balanced against the long-term tax implications. There are two ways that your company will receive income from the share investments that they have purchased. The first instance is that income will be paid out in the form of dividends. The second instance is that, at a later stage, the company can realise their increase in capital value. The tax benefits above are just 2 examples, and they need to be considered within the context of a much bigger business picture. There is no universal truth as to what the correct answer is as there are SO many influencing factors, individual goals and circumstances. Remember: if you hold the shares personally, then you will be taxed on the income generated from those shares. The tax will be at the applicable dividend(payout of profit) rate where the dividends exceed £2, 000. (allowance for 20/21). The rates, for the past 5 years, have been 7.5% for those in the basic tax bracket, 32.5% for those in the higher tax bracket, and 38.1% for those in the additional rate taxpayers category. As mentioned above, capital reserves built from income from these specific investments will attract a total of 40% tax if still within the company after 18 months. Leaving the funds to sit is a decision that needs careful consideration as there could be issues with having a large cash balance sitting in the company. What a wonderful ‘problem’ to have. Suppose it turns out that the income generated from your astute investments is substantial enough to change the nature of your company from trading to investment in the eyes of the law. In that case, it might be a consideration to set up a separate company that is solely used as an investment arm of your business. One of the first discussions to be had with your accounting, or virtual CFO, is to conclude what the aims are to be derived from the investment, e.g. to generate income to build capital reserves, then using a company to invest will be a good option. If it is expected that there won’t be income generated, then perhaps personal ownership is the better option as there will be a lower tax charge on capital growth. Congratulations on having grown your company to this new phase. Onwards and upwards!
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