Businesses from time to time may have surplus capital which isn’t needed for the day to day running of the business. If the business decides not to distribute the business surplus funds or utilise them within the business then it could invest rather than leaving them on deposit.

In addition to the tax on the investments themselves there may also be tax implications for the business owners. So as a business owner its important to consider whether to invest rather than distribute to shareholders.

The taxation of your company held investments is very different to how you are taxed when they are held personally. It is therefore essential for you to obtain professional financial advice about the ongoing tax implications on your business investments.

Historic cost basis

Companies are subject to corporation tax on the income and gains they receive from the investments they make. How your business investments are taxed will depend upon the accounting basis your company uses and the type of investment held.
The size and nature of your company will determine the accounting standards you can use. If a trading company qualifies as a micro-entity, you can use the historic cost basis of accounting for all your investments – cash, investment bonds and open- ended investment company (OEIC). Historic cost accounting effectively means that tax is only payable where a withdrawal is taken in the accounting period. Companies regarded as ‘investment companies’ do not qualify as a micro-entity.

Tax deferment

Micro-entity status means that tax deferment is possible and the company may be able to plan the timing of withdrawals to its advantage. For example, a withdrawal could be taken in a year where there are losses available to offset against the investment gains.
To be eligible for the micro-entity regime, the company must meet two of the following criteria: turnover of £632,000 or less; balance sheet assets of up to £316,000, and an average of 10 employees or less. For all other companies the type of investment will determine how they are accounted for and subsequently how they are taxed.

Unit trusts/OEICs

The taxation of the income and gains on OEICs or unit trusts, for corporate investors is determined by the mix of the underlying assets within the fund. Where the fund manager invests greater than 60% of the fund in cash or fixed interest (such as gilts and corporate bonds), the fund will be classed as a non- equity fund and income will be treated as an interest distribution.
Where the fund contains less than 60% in cash or fixed interest, the fund will be classed as an equity fund and income will be treated as a dividend distribution.

Investment bonds

A company owned investment bond or capital redemption bond are assessed for corporation tax under the loan relationship rules and not the chargeable event legislation. Generally companies which are not micro-entities will need to use the fair value accounting basis for their bond investments.
Under this basis, the investment bond is valued at its market value, that is, the surrender value at the end of each accounting period. Any growth (or loss) over the value from the previous accounting period (the carrying value) will be included in the loan relationship account and be subject to corporation tax. There is no tax deferment as gains are taxed each year even if no withdrawals are taken.

Other investments

As well as investment bonds and non- equity mutual funds, the loan relationship rules cover most other corporate investment vehicles such as: bank or building society deposits, gilts, corporate bonds, capital redemption policies and certain life assurance policies. The loan relationship rules are complex and deal with the taxation of loans between a company and another party (whether a company or not). These rules include certain investments which are viewed to be loans owed to the company.
Life assurance policies (both onshore and offshore) which have a surrender value, purchased life annuities and capital redemption policies are all included within the loan relationship account. There’s an exemption for pre 14 March 1989 policies. This exemption doesn’t apply to purchased life annuities or capital redemption policies.
Term assurance and critical illness contracts used for business protection purposes generally won’t be included as they typically don’t include a surrender value. Such policies remain subject to the chargeable events legislation.

Fund switching

Switches on collective investments will be considered as ‘disposals’ so will need to be accounted for within the company accounts. Onshore and offshore bonds are structured differently as the bond provider owns the assets within the bond. The effect of this is that any fund switches will not trigger a gain or loss position for the company.

Reporting

Income earned on a collective is taxable on an arising basis, therefore all income earned during the accounting period will need to be included within the company accounts. In addition, depending on the fund asset allocation (fixed interest or equity), gains will also need to be reported either year on year (fixed interest) or when realised (equity).
Income within a bond is not taxable on the company so does not need to be accounted for. Instead the bond value is accounted for year on year (fair value) or as a static value (historic cost). Disposals on either basis will need to be accounted for.

Risks and considerations

The size of the investment could impact on the availability of the two different tax exemptions/allowances available, namely capital gains tax Entrepreneur’s Relief and Inheritance Tax Business Property Relief. Therefore, professional financial advice should be obtained before making any investment decisions.
It is important to look at your company’s financial arrangements holistically to make sure the investment fits with your overall objectives and plans.

Do you have a cash surplus built up in your company?

Diversifying into other securities and assets could give your business multiple revenue streams and the potential to generate more money that could be reinvested into your business. It also gives any business surplus funds a chance to grow rather than leaving it in a savings account with an incredibly low interest rate. To discuss your options or to find out more contact RockWealth on 01926 969010 or email corporate@rockwealth.co.uk.