Corporation tax has been falling for the past 13 years. Since David Cameron’s time in office, corporation tax came down from 28% in 2010 to the current rate of 19%, arguably as a growing incentive for businesses to invest. This new tax year, however, corporation tax has been announced to rise for the first time in over a decade, and it will now reach 25%.
Under previously low corporation tax rates, business owners have been free to invest their surplus profits in many different ways without incurring large tax bills. Now, with tax rises around the corner, politicians and business professionals have been debating the power of low corporation tax rates as the sole investment incentive, arguing that there’s a bigger picture involving the country’s overall business environment rather than mere tax rates that make corporate investing attractive.
However, opportunities in corporate investing remain, which we discuss in more detail in this post. Despite rising tax rates, there are potential upsides to investing your company’s excess funds as opposed to leaving them idle.
What is corporate investing?
Corporate investing is simply putting your business profits to good use. Rather than holding it in a bank account or using it as income and incurring heavy tax charges, many business owners choose corporate investing as a tax-efficient way to use their excess funds and benefit the company.
Advantages of corporate investing
Over the past 13 years, the corporation tax decrease has made investing particularly attractive to companies. Low rates meant that business owners could use their surplus returns in savvy ways and circulate those funds back into the good of the business as opposed to losing a significant portion of it to tax.
Even though tax rates are rising by over 30% this April, there are some other advantages of corporate investing including:
· It gives you the opportunity to diversify across other assets and securities, allowing your business to benefit from several revenue streams,
· Your business has the potential to go further through reinvesting and generating additional funds,
· It allows your leftover money to grow and be used wisely rather than sitting idly in a savings account.
Disadvantages of corporate investing
When making any kind of investment, there’s always a risk of losing some or all of your money. There are many different methods, each with varying ratios of risk to reward, and depending on the health of the economy and the market you’re investing in, there’s always a risk of failing to achieve your expected returns. Therefore, it’s important to make clear, educated, and worthwhile decisions before choosing corporate investing. Owning a business is risky in itself, so you’re likely to have a healthy understanding of the investments that appeal to you already as well as a knowledgeable team of financial advisors to help.
Another point to bear in mind is that, if you anticipate needing quick access to your funds, then corporate investing may not be a suitable option. This could be the case if your business is seasonal or your company is still in its early stages, so locking money away may be impractical. In this case, however, you could consider temporary investment options like short-term bonds or gilts.
Methods to consider for corporate investing
There are several factors to think about if you’re looking for a suitable investment method. Choosing the right investment for you and your company depends on factors such as:
· Your business goals
· Your expected returns
· Your time horizon
· The sectors that interest you/will benefit your business
· Whether you’d prefer an active or passive form of investing
Some popular investment vehicles you could consider include:
· Funds – you can choose mutual funds that allow you to benefit from a portfolio or sector-specific funds. It’s worth noting that the returns you make from investment funds are not taxed if they are reinvested in other funds.
· Trusts – invest in a broad area or a specific market alongside other investors.
· Pensions – employer’s pension contributions are exempt from income tax and national insurance. However, it does mean that you won’t be able to access your money until retirement.
· Shares – you could choose to buy shares in a company that you believe will succeed enough to meet your investment needs. This method can offer attractive returns, but if you choose to sell your shares, you may be liable to Capital Gains Tax on the profit you make. However, there are also a number of relief schemes that you could be entitled to.
· Bonds – Depending on your risk tolerance, there are many different types of bonds that could be suitable for you. If you’re risk-averse, you might be comfortable with government bonds, or if you’re looking for higher returns, you could consider corporate bonds.
How is a corporate investment taxed?
There may be some tax implications to think about when it comes to corporate investing. The taxation that applies to you will depend on factors such as the size of your company, its accounting practice, and the type of investment method.
The below table shows the UK eligibility criteria for the taxation of corporate investments:
|Source of eligibility criteria||Sections 384A and 384B of the Companies Act 2006||Sections 382 and 348 of the Companies Act 2006|
|Eligible entities||· Companies|
· Limited Liability Partnerships and qualifying partnerships
· Limited Liability Partnerships
· Any other type of entity that would have met the criteria of the small companies regime had it been a company incorporated under company law
|Size threshold||A company qualifies if it does not exceed two or more of the following criteria:|
· Turnover: £632,000
· Balance sheet total: £316,000
· No. of employees: 10
|A company qualifies if it does not exceed two or more of the following criteria:|
· Turnover: £10.2m
· Balance sheet total: £5.1m
· No. of employees: 50
|Ineligible entities||· Any company excluded from the small companies regime|
· Financial institutions including credit and insurance
· Small parent companies that choose to prepare group accounts
· Non-parent companies whose accounts are included in group accounts
|· Public companies|
· Financial institutions including insurance and banking companies
|Accountancy practice||Historic accounting||Fair value accounting|
Micro-entities will only have to pay tax on investments once a realised gain is made. Small entities, on the other hand, are taxed on any basic financial investment like stocks, shares, or bonds, once they are realised. Other investments like gold or oil need to be declared on your annual tax return. If you own an investment company, it is excluded from the micro-entities regime, so a fair value basis will apply.
Don’t forget the annual Capital Gains Tax (CGT) threshold of £6,000 this tax year (£3,000 for trustees). When planning a corporate investment, consider whether it might push you over the cap, and if your corporate investment is estate-based, it’s worth checking your eligibility for business property relief, which allows estate assets to be passed on at a reduced Inheritance Tax rate.
Consult your financial advisors
Corporate investing can be an effective way of minimising tax implications on your company’s surplus cash, but it can also be complicated. To make sure you get the most out of your investment, we always recommend speaking to your team of financial advisors; your accountants and investment planners can help you work out the potential tax charges you might face depending on the methods you’re considering.
Corporate investing and bonds
Bonds can be an excellent source of diversification if that’s one of your priorities when looking for your next corporate investment.
If you choose to invest in bonds, you could consider Propiteer Capital. The Propiteer Capital Property Bond offers investors a unique opportunity to benefit from the lucrative UK property market with fixed rates and flexible payment options, so you can plan your company’s finances easily.
Your investment in Propiteer Capital is dedicated towards a secure and diverse property portfolio that covers a range of property types and geographic locations, allowing you to conveniently diversify your assets at the same time.
To find out more about how you can benefit from the property market with the Propiteer Capital Property Bond, visit our website or give our team a call on 01376 319 000.
Tax legislation and the levels of relief from taxation can change at any time. Any change in the tax status of an investment or in tax legislation could affect the value of the investments held or their ability to provide returns to its investors. The tax treatment of an investment, and any returns received, will depend on the individual circumstances of the investor and may be subject to change in the future. If investors are in any doubt as to their tax position, they should consult their professional adviser.
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