Downsides to investing within limited company?

[simon800]

I'd be very keen to hear from those who invest (or have considered investing) excess profits within the wrapper of their own limited company. Specifically around the disadvantages to doing so.

We are in the fortunate position of having excess profits once taking out healthy dividends to both company directors (2 man band), dividends paid to shareholders (spouses) and pension contributions.

As per previous threads we have considered setting up a "Family Investment Company" - 1 for me, one for my business partner. Excess profits channelled into the FIC, ring fenced from the trading company and I can invest mine as I please (likely equities/bonds) and he can invest his as he pleases (he prefers higher risk single company stocks).

However......start up costs to the FIC are high, plus ongoing costs, and a general feeling you need some serious economies of scale for it be worthwhile.

As a "diet" version of the same concept we are thinking of doing the following;

1. Set up company trading account on Interactive Investor or similar
2. Agree an investment strategy and asset allocation
3. Invest excess profits in line with investment strategy

Aside from the obvious (what if you can't agree on asset allocation), what are the technical downsides to investing in a ltd company wrapper?

Is there anything to watch out for?

What downside would there be to say £100k of excess profits being invested into a portfolio of equities/bonds/gold/cash etc for the next 20 years for example?

[DaveA8]

I wish I knew 20yrs ago what I know now or that someone had given me a better insight.
What you ask about is a very complex area of compliance, not least that your trading profits will be viewed apart from any investment profits and losses from investments will need to be suitably dealt with.
It will almost definitely draw HMRC interest as and when accounts are filed, even if they aren't certain what they are looking for, they will ask, that is not to say you shouldn't do it but it's another reason. It's strange, we had an investment property and it never ever raised an eyebrow but the first year where we held shares and made a small profit and paid taxes, I think but can't be certain that it was at the same rate as trading profits but might have been listed apart, anyway a few months after accounts were submitted, we were asked for chapter and verse and after supplying that they wanted a meeting.
I'd get your accountant on board and let them consider the variables

[isleofthorns]

Generally a bad idea.

I kept excess profits in my company and invested them over time in property, stocks etc. I now have a non-trading company for BPR and BADR purposes, despite still being trading, and am trying to figure out how to unwind this unwanted position.

If you want to invest funds in the company, I'd ask your accountants to advise you if they think you're blurring the lines between trading and non-trading - you can google the criteria - but it's not concrete in law and is subjective, so best to steer clear with a wide margin of error.

Best scenario, if possible, would be to employ these funds in your existing trade, or in another qualifying trading activity.

[hooters123]

Is there any scope to invest the profits in the business in order to grow and ultimately earn more money?

Otherwise I'd be looking at tax efficient ways to take the money out, e.g. pension contributions etc.

[simon800]

DaveA8 said:

I wish I knew 20yrs ago what I know now or that someone had given me a better insight.
What you ask about is a very complex area of compliance, not least that your trading profits will be viewed apart from any investment profits and losses from investments will need to be suitably dealt with.
It will almost definitely draw HMRC interest as and when accounts are filed, even if they aren't certain what they are looking for, they will ask, that is not to say you shouldn't do it but it's another reason. It's strange, we had an investment property and it never ever raised an eyebrow but the first year where we held shares and made a small profit and paid taxes, I think but can't be certain that it was at the same rate as trading profits but might have been listed apart, anyway a few months after accounts were submitted, we were asked for chapter and verse and after supplying that they wanted a meeting.
I'd get your accountant on board and let them consider the variables

Thanks Dave, have asked the accountant today so will see what they come back with!

[simon800]

NowWatchThisDrive said:

I don't run a business so I've only ever considered FICs as a vehicle for personal unwrapped investments, rather than excess company profits. On the face of it I think it makes more sense for someone in your situation than mine, although I've no idea how HMRC would treat it being done inside an existing trading company.

Putting aside cost as presumably you've already modelled everything and you're happy with that aspect, the main things that put me off were that we'd have to incur an absolutely eye-watering amount of CGT to get the money into the company to start with (whereas for you it's already there), and the lack of CGT indexation allowance since 2018. If you do go through with it there are plenty of little optimisations and quirks you can exploit depending on your circumstances, investment strategy and how adventurous you want to be, although I reckon many of them veer into tail wagging dog territory or financial engineering for the sake of it.

Thanks for this. Yes I think the fact the £'s are already IN a ltd company and can be transferred to another at no cost makes the FIC interesting.

But the setup fees and ongoing admin costs dont appeal so much! An alternative which allows investment in a Ltd Co wrapper is ideal.

Have also asked the accountant about setting up a separate Ltd Co (not an FIC) and doing an intra company loan from trading company to investment company.....will see what they say!

[simon800]

isleofthorns said:

Generally a bad idea.

I kept excess profits in my company and invested them over time in property, stocks etc. I now have a non-trading company for BPR and BADR purposes, despite still being trading, and am trying to figure out how to unwind this unwanted position.

I think this is the main headwind isn't it, how to navigate that. Wondering if the intra company loan to a separate ltd co gets around it....

[simon800]

hooters123 said:

Is there any scope to invest the profits in the business in order to grow and ultimately earn more money?

Otherwise I'd be looking at tax efficient ways to take the money out, e.g. pension contributions etc.

Thanks for this, someone asked on another thread and it's a valid question. Reinvesting for growth for us would mean hiring employees, something we simply have no interest in doing and would in all likelihood see a significant reduction in profit rather than increase.

Pensions etc are already in a very healthy position and 20 years away from being accessed, so really seeking ways to continue investing within the wrapper of a ltd co, but also with flexibility that if the money was needed to bridge a gap between retirement and pension access it could be....

[OutInTheShed]

AIUI, the complexity is your LTD Co becomes primarily an investment co, so the treatment of entrepreneurs relief and so on is not so good when you eventually wind up the company.

I think 'exit strategy' is a big thing, bloke I know invested via his company in commercial property, he's 'retired' from his main business but draws a salary from the company still, I think he's slowly transferring the company to his daughter.

Talking to t a few people, I think these things can work if you are playing a long game, but the longer the game, the more possibility of the rules changing....


So many clever schemes mostly benefit the accountants....

[NorthDave]

The costs of setting up a new ltd company should not be much. Investing through your existing company removes Entrepreneurs tax relief (I think) and also leaves you liable should someone sue you in future.

[simon800]

Thanks OutintheShed & NorthDave - yes I think losing entrepreneurs relief would be painful actually.

Will be keen to see if this is impacted if we do the 2nd option, i.e. loan money to 2nd ltd company. If that allows us to (a) ring fence the money and (b) doesnt impact entrepreneurs relief that could well be the answer.

Have asked the accountant/tax advisor!

[LooneyTunes]

simon800 said:

Thanks for this. Yes I think the fact the £'s are already IN a ltd company and can be transferred to another at no cost makes the FIC interesting.

But the setup fees and ongoing admin costs dont appeal so much! An alternative which allows investment in a Ltd Co wrapper is ideal.

Have also asked the accountant about setting up a separate Ltd Co (not an FIC) and doing an intra company loan from trading company to investment company.....will see what they say!

What I expect he'll say is that it probably won't give you the ring-fencing you want simply due to the directors' duties and the loan ultimately being repayable.

Making a long-term loan, especially if interest free, might be argued as running contrary to the responsibilities the directors owe to TradingCo, whereas having it repayable on demand/at short notice is arguably bad for InvestmentCo (simply because it may force you to crystallise an unfavourable position in order to meet your repayment obligations). Don't forget too that depending on how things are drafted, insolvency of TradingCo, or an exit, could also result in the acceleration of the loan repayment. Potentially other adverse effects if you wanted to raise debt for TradingCo too.

Sometimes, unpalatable as it can feel at the time, the right thing to do can simply be to take the money out, pay the tax, and invest through an entirely personal structure.

[lizardbrain]

I was (informally) advised that as long as interests and dividends from investments don't exceed 10% of net profits after tax, then it's not likely to be a problem.

Not set in stone or anything, but seems logical to me.

[NorthDave]

LooneyTunes said:

What I expect he'll say is that it probably won't give you the ring-fencing you want simply due to the directors' duties and the loan ultimately being repayable.

Instead of loaning from one company to another I think you transfer your shares in the trading company to the investment company. Instead of dividends coming from the trading co to you personally they go to invest co which can then invest or pass to you as a dividend.

[trickywoo]

I think you either need to suck up the tax and view it as just another expense of doing business or go offshore with the expert advice and trouble that entails.

In car terms you are trying to go from 50mpg to 60mpg. Worthwhile if you are doing 100k a year, less so if not.

[simon800]

trickywoo said:

I think you either need to suck up the tax and view it as just another expense of doing business or go offshore with the expert advice and trouble that entails.

In car terms you are trying to go from 50mpg to 60mpg. Worthwhile if you are doing 100k a year, less so if not.

I am not sure on this - simply put if you've maxed out dividends and pension and you don't NEED to take any more out the business because all you'd do is invest it in a general investment account outside of ISA wrappers - why would you take the money out and pay tax on it when you do have the option (even if slightly complicated) to simply invest it within the wrapper of the business?

Or in other words why pay 45% tax to do the exact same thing with the money that you could do paying 0% tax today? Surely it's more efficient to simply keep it in the ltd co wrapper, do your thing with it, and then draw down on it in a tax efficient manner in 20/30 years time when you actually need it?

[trickywoo]

simon800 said:

draw down on it in a tax efficient manner in 20/30 years time when you actually need it?

Are taxation rates going to be lower in 20/30 years than they are now? Is the money going to keep pace with inflation for that time period?

[simon800]

trickywoo said:

Are taxation rates going to be lower in 20/30 years than they are now? Is the money going to keep pace with inflation for that time period?

No idea on taxation rates in 20-30 years time unfortunately, however I know I won't be working then! So if I have a pot in a ltd co to draw down on I can do so in future as a sole income.

This seems preferable to paying income tax and going beyond the taper allowance to simply invest outside of a tax wrapper in today's money.

I genuinely hope equities keep pace with inflation over the next 20-30 years but who knows!

[forest172]

I have £100k in a IM GIA. Just called it the name of my firm on the account preferences which run alongside other accounts I have with them

I just leave the funds over what I need in the business. Hopefullyone day when I retire I can just draw down on the cash left in the company account.

[hooters123]

simon800 said:

Thanks for this, someone asked on another thread and it's a valid question. Reinvesting for growth for us would mean hiring employees, something we simply have no interest in doing and would in all likelihood see a significant reduction in profit rather than increase.

Pensions etc are already in a very healthy position and 20 years away from being accessed, so really seeking ways to continue investing within the wrapper of a ltd co, but also with flexibility that if the money was needed to bridge a gap between retirement and pension access it could be....

Hmm. It's a very interesting question, and one which I don't think we can answer with the info we have. If I was you I'd be creating a few spreadsheets to compare the effect of taking money out now, investing in ISAs, using your annual CGT allowance etc (and don't forget, no tax until you crystalise a gain but do allow for dividends/distributions) vs. leaving money in the company and paying corporation tax on the trading profits.

The outcome is very much going to depend on what other income and gains you have, whether you've used your ISA limits etc.