Pre tax investing via company?

[trowelhead]

Does anyone here have experience of how to set up an investment company to invest pre income tax cash?

What I mean by this is as follows:

Trading ltd company (in IT for example) makes profit of 200k for example

20% corp tax deducted leaving 160k cash in the company

Now let's say we wanted to use this cash to invest in property. To take it as dividend / salary would trigger another 20%+ income tax liability.

So I'm wondering if it is possible to set up another company for the sole purpose of property investment

My thoughts are a group structure. Holding company owns IT trading company and property investing company. Would this mean that post corp tax cash can be moved on from the trading company to the investment company with no extra tax liability?

Cheers!

[Alpinestars]

In short yes, but you create other problems by using your suggested structure.

In your scenario you could pay a dividend to holdco (tax and withholding tax free), and holdco could invest the cash via a loan or share capital into propco.

Or even simpler, but with potentially other complications, IT co could lend the money direct to Propco.

You obviously need to consider the merits of owning property in a company and running 3 companies. An obvious downside is that a disposal of IT co in the future might not qualify for Entrepreneurs' relief or Substantial Sharholding exemption, both of which rely on the group being a trading group. Property investment is not trading for these purposes.

A sale of the property at a gain by Propco would be taxable in propco and getting the money out of holdco would be taxable again (double tax).

[trowelhead]

Alpinestars thanks for the info!

Do you think it would be more efficient to setup another company completely separate to trading company, then loan the money from trading co to investment co?

Intention is to hold investments in investment company for the long term.

[sideways sid]

A couple of other potential options for the OP, for Alpinestars (and others) to critique:

1. Close TradingCo, get Entrepreneurs relief so use remaining £180k to buy property personally. Open TradingCo#2 to continue current trading activity.
2. Trading Co pays £200k into SIPP as Employers Pension Contribution (over sufficient years to comply with pension cap). SIPP buys property to hold within pension.
3. Trading Co lends £200k to new PropCo. PropCo repays loan on agreed terms and perhaps also enters into management agreement with TradingCo to move rental income to TradingCo.
4. If intention is to buy more property over time, do 1 or 3, but buy through new PropCo based in a low-tax environment, basically allowing rental income to roll-up over time, deferring tax payable.

[Alpinestars]

sideways sid said:

A couple of other potential options for the OP, for Alpinestars (and others) to critique:

1. Close TradingCo, get Entrepreneurs relief so use remaining £180k to buy property personally. Open TradingCo#2 to continue current trading activity.
2. Trading Co pays £200k into SIPP as Employers Pension Contribution (over sufficient years to comply with pension cap). SIPP buys property to hold within pension.
3. Trading Co lends £200k to new PropCo. PropCo repays loan on agreed terms and perhaps also enters into management agreement with TradingCo to move rental income to TradingCo.
4. If intention is to buy more property over time, do 1 or 3, but buy through new PropCo based in a low-tax environment, basically allowing rental income to roll-up over time, deferring tax payable.

Good thoughts.

1. Works but is a one off benefit. Ie, getting ER now and potentially never again. But at least you get it once, on today's value.
2. No idea.
3. Doesn't work. The rental income would be non trading income so it's not that different to OP's initial suggestion.
4. Doesn't work. Any rental income is subject to tax being withheld ie. the company would only receive rental income less 20% withholding, effectively accelerating tax. Or the company could apply the Non Resident Landlord Scheme and be subject to UK tax. So it's a nothing. You might be thinking of capitals gains on sale, not deferring tax on income.

[Alpinestars]

trowelhead said:

Alpinestars thanks for the info!

Do you think it would be more efficient to setup another company completely separate to trading company, then loan the money from trading co to investment co?

Intention is to hold investments in investment company for the long term.

It might be. You're still "tainting" the trading company with non trading assets (the loan) and potential income in the form of any interest on the loan, which for tax purposes can be nil. It's better than your original suggestion.

[trowelhead]

Great ideas there. I've considered the SIPP option with holding commercial property but I'd potentially like to be able to access rental income before retirement age.

Entrepreneurs relief is another good option potentially down the line.

[Alpinestars]

Bit leftfield, but I think the following has a good chance of working. The definition of a trading company for ER is not defined in law, hence it is a bit subjective.

You set up a holdco with £100 of ordinary share capital.
IT co subscribes for non ordinary shares as defined for these purposes eg, certain preference shares, in Propco, for cash.
Propco uses the cash to buy properties.
If and when you want to sell IT co, IT co would make a loan to you, you'd buy the preference shares in Propco, and sell the IT co. You'd repay the loan with the proceeds.

A sale of IT shares should qualify for ER. It's a complicated analysis (or more to the point, i can't be bothered explaining it unless you want me to) as to why this works and holding ordinary shares in Propco doesn't.

Probably over engineered and I've not thought about all the consequences, but something to ponder over.

[trowelhead]

Alpinestars said:

Bit leftfield, but I think the following has a good chance of working...

Thanks Alpinestars! I think i'm understanding this.. But in this case can you explain why the holding co. is needed?

Eg. could this not be carried out between IT co. and Prop co. directly?

Cheers

[Alpinestars]

trowelhead said:

Thanks Alpinestars! I think i'm understanding this.. But in this case can you explain why the holding co. is needed?

Eg. could this not be carried out between IT co. and Prop co. directly?

Cheers

Sorry I've just re read what I wrote. Which was on a train back from a client. So apologies for the confusion. When I said you subscribe for shares in holdco, I meant Propco.

To be clear the structure is,

You own all the shares in IT co.
You own ordinary shares in Propco.
IT co owns pref shares in Propco.

Make sense?

[anonymous-user]

Alpinestars said:

To be clear the structure is,

You own all the shares in IT co.
You own ordinary shares in Propco.
IT co owns pref shares in Propco.

Make sense?

That's a really interesting idea, which I hadn't got close to thinking about. Definitely one keep in mind to discuss with the accountant.

[anonymous-user]

sideways sid said:

A couple of other potential options for the OP, for Alpinestars (and others) to critique:

2. Trading Co pays £200k into SIPP as Employers Pension Contribution (over sufficient years to comply with pension cap). SIPP buys property to hold within pension.

I have a family member who does this option, but it gets tricky to comply with all of the SIPP rules, plus if you are doing complicated things you need expert advice, to ensure the documentation trail stands up to scrutiny. Plus of course, you are limited to commercial property investments.

[Guvernator]

I'm in a similar situation. I have money stuck in my company account which I can't really touch due to getting hit with tax if I do. What's the best way to use or invest this so that I get some sort of return on it rather than it just sitting their doing nothing? The last post mentions investing in a SIPP. I've heard of this before but what's involved in setting a SIPP up? How much can you put into a SIPP and what sort of things will that allow you to invest in? Also doesn't putting money of investing\buying property with a SIPP mean you can't touch it until you retire?

[trowelhead]

Alpinestars said:

To be clear the structure is,

You own all the shares in IT co.
You own ordinary shares in Propco.
IT co owns pref shares in Propco.

Make sense?

This has potential! To clarify, the cash would be moved into Propco from the it company buying shares - would there be a need for a holding company at all? And what is the reasoning behind the choice of share classes used?

Thanks again definitely something to think about here!

[Alpinestars]

trowelhead said:

This has potential! To clarify, the cash would be moved into Propco from the it company buying shares - would there be a need for a holding company at all? And what is the reasoning behind the choice of share classes used?

Thanks again definitely something to think about here!

No need for a holdco as stated above. It was a typo in my post a few days ago - just a single new company (Propco).

Why the use of different shares? Long winded, and technical, but it's essential.

A trading company or group is not defined in law, but you need IT co to be trading to qualify for ER.

HMRC broadly looks to 3 things to establish trading status, and a company needs to pass at least 2 of the tests;
1. Turnover and income
2. Gross assets
3. Management time spent on activities.

For trading statues, HMRC uses an 80% threshold, eg is 80% or more of the company's turnover and income derived from trading activities? The test needs to be passed for the whole 12 months prior to disposal of IT co shares.

If Propco were in a tax group for ER purposes with IT co (eg IT co holds >50% of the ordinary share capital of Propco (or vice versa)) then you'd "consolidate" the two companies when looking at the 3 tests. The results would be;

1. Turnover and income - Propcos rental income would be included which might result in failing the 80% test.
2. Assets - Propcos assets are included so the asset test would probably fail?
3. Management time - Propcos results are included but I'd guess that less than 20% of management's time would be spent on Propcos business. So you'd pass this test.

So you can see how you might fail 2 tests if you have to "consolidate" Propco.

You therefore have to think of a structure which allows money to pass from IT co to Propco, but which does not cause Propco to be in the same ER group as IT co. This is where the preference shares come in. (Certain) preference shares are not ordinary share capital for ER purposes. Therefore if IT co subscribes for these type of prefs, it will not be in the same ER group as Propco. Which means it does not have to "consolidate" activities with Propco for the purposes of establishing ER trading status. Instead the tests look as follows;

1. Turnover and income - only include IT's income (trading) and income on the prefs (non trading and can be very small). Therefore income test is passed.

2. Assets - include IT's investment in pref shares - probably a fail again.

3. Management time - broadly same answer as before so pass.

So you can see that we include far less income using the suggested structure. Which could make all the difference.

There is still some uncertainty as the trading tests are not statutory, but they are in the HMRC manuals. And if HMRC wanted to be difficult, they could argue that you need to pass all 3 tests. So you'll never have certainty that it works, but it could be worth trying, especially if you lock in ER as suggested early on in the thread.

[trowelhead]

Alpinestars said:

Why the use of different shares? Long winded, and technical, but it's essential.

Alpinestars - will you become my accountant?

Thanks for explaining that makes perfect sense to me. Seems like this is pretty much the best option. Will run this past my accountant - thanks for the help.

[Alpinestars]

trowelhead said:

Alpinestars - will you become my accountant?

Thanks for explaining that makes perfect sense to me. Seems like this is pretty much the best option. Will run this past my accountant - thanks for the help.

No problem. Give me a shout if you need any more help.