Avoiding CGT by using a company & employer pension contribs?
Discussion
In my ongoing crusade to ensure that Rachel from Accounts gets as little of my income as possible...

..I'm eyeing the CGT I pay on trading gains that are generated outside ISAs and pension.
What's to stop me from setting up a limited company, funding it with a chunk of cash, generating my gains, and then paying myself a small salary (under the employer's NIC threshold), with the rest as an employer's pension contribution?
Feels like it's too good to be true, and where better to be told why it won't work than PH?

..I'm eyeing the CGT I pay on trading gains that are generated outside ISAs and pension.
What's to stop me from setting up a limited company, funding it with a chunk of cash, generating my gains, and then paying myself a small salary (under the employer's NIC threshold), with the rest as an employer's pension contribution?
Feels like it's too good to be true, and where better to be told why it won't work than PH?

your company would be paying Corp tax on the profit and you'd be taking Div's which unless i'm mistaken would work out worse than just paying the CGT?
And you'd be using up some of your tax allowance which might put you into a worse position if you're still working or when it comes to taking pension?
depending amounts and longer term aims....one thing that culd be considered if you're not needing the funds short term is to build up a decent amount in a GIA and let teh share appreciation get to a point where you can just borrow /use margin against the collateral of the portfolio.
And you'd be using up some of your tax allowance which might put you into a worse position if you're still working or when it comes to taking pension?
depending amounts and longer term aims....one thing that culd be considered if you're not needing the funds short term is to build up a decent amount in a GIA and let teh share appreciation get to a point where you can just borrow /use margin against the collateral of the portfolio.
greengreenwood7 said:
your company would be paying Corp tax on the profit and you'd be taking Div's...
No. No profit and no dividends.Let's say the company generates £65,000 revenue. It pays me a £5,000 salary, and makes £60,000 in employer's pension contributions.
The company makes no profit (so no corporation tax to pay), the salary is below the threshold for employer's NICs, and the employer's pension contributions don't incur any employer's NICs.
HMRC's Company Taxation Manual said:
CTM08040 - Corporation Tax: management expenses: investment company - with investment business
From 1 April 2004 the term ‘investment company’ is only applicable in limited circumstances (CTM08020). From that date management expenses are available to any ‘company with investment business’.
This is defined in the legislation as "…any company whose business consists wholly or partly in the making of investments".
This is a relaxation of the previous provisions where a company had to have a business that consisted wholly or mainly in the making of investments. The investment income requirement (that the principal part of the income had to be from investments) has also been dropped.
From 1 April 2004 the term ‘investment company’ is only applicable in limited circumstances (CTM08020). From that date management expenses are available to any ‘company with investment business’.
This is defined in the legislation as "…any company whose business consists wholly or partly in the making of investments".
This is a relaxation of the previous provisions where a company had to have a business that consisted wholly or mainly in the making of investments. The investment income requirement (that the principal part of the income had to be from investments) has also been dropped.
That's only part of the picture. This particular article is mostly behind a paywall but its tone should give you a flavour.
https://www.lexisnexis.co.uk/tolley/tax/guidance/d...
As ever, if it was easy everybody would be doing it.
https://www.lexisnexis.co.uk/tolley/tax/guidance/d...
As ever, if it was easy everybody would be doing it.
As above particularly the last line.
There was another recent thread about PIC / FIC’s and it seemed that even the start up / ongoing Accountant costs made it unviable.
A quick google then made it clearer that anything less than a £1m “ investment “ and probably closer to double that was a non starter.
There was another recent thread about PIC / FIC’s and it seemed that even the start up / ongoing Accountant costs made it unviable.
A quick google then made it clearer that anything less than a £1m “ investment “ and probably closer to double that was a non starter.
MadCaptainJack said:
No. No profit and no dividends.
Let's say the company generates £65,000 revenue. It pays me a £5,000 salary, and makes £60,000 in employer's pension contributions.
Let's say the company generates £65,000 revenue. It pays me a £5,000 salary, and makes £60,000 in employer's pension contributions.
HMRC said:
It’s up to you to make sure you’re not getting tax relief on pension contributions worth more than 100% of your annual earnings. HM Revenue and Customs (HMRC) can ask you to pay back anything over this limit.
I'm not an accountant or tax adviser, although I do have recent/ongoing experience of FIC setup and some of the costs + hassle involved.
I think that even if you could get this to make sense in the context of your individual tax position, and HMRC were happy with the co paying out the entirety of its earnings in salary and employer pension contributions to its sole director/shareholder (possibly further complicated, as Panamax suggests, by it being an investment rather than trading company), on numbers like those it's unlikely to be worth the cost of setting up and running the FIC anyway.
I think that even if you could get this to make sense in the context of your individual tax position, and HMRC were happy with the co paying out the entirety of its earnings in salary and employer pension contributions to its sole director/shareholder (possibly further complicated, as Panamax suggests, by it being an investment rather than trading company), on numbers like those it's unlikely to be worth the cost of setting up and running the FIC anyway.
Panamax said:
That's only part of the picture. This particular article is mostly behind a paywall but its tone should give you a flavour.
https://www.lexisnexis.co.uk/tolley/tax/guidance/d...
Thanks, I've read that (and a bunch of the linked articles). The big focus seems to be on "expenses of management" but I probably wouldn't care whether the salary and pension contributions were characterised as "expenses of management" or normal revenue expenses because the nature of the trading is short term, so the capital gains would be realised in the short-term, rather than months/years hence, so there would be no significant advantage of trying to characterise expenses as expenses of management.https://www.lexisnexis.co.uk/tolley/tax/guidance/d...
Panamax said:
As ever, if it was easy everybody would be doing it.
Well, "easy" is subjective...NowWatchThisDrive said:
I'm not an accountant or tax adviser, although I do have recent/ongoing experience of FIC setup and some of the costs + hassle involved.
I think that even if you could get this to make sense in the context of your individual tax position, and HMRC were happy with the co paying out the entirety of its earnings in salary and employer pension contributions to its sole director/shareholder (possibly further complicated, as Panamax suggests, by it being an investment rather than trading company), on numbers like those it's unlikely to be worth the cost of setting up and running the FIC anyway.
Thank you. Good to get some insight from someone with actual experience in this area! I think that even if you could get this to make sense in the context of your individual tax position, and HMRC were happy with the co paying out the entirety of its earnings in salary and employer pension contributions to its sole director/shareholder (possibly further complicated, as Panamax suggests, by it being an investment rather than trading company), on numbers like those it's unlikely to be worth the cost of setting up and running the FIC anyway.
24% of £65,000 is £15,600, so it may still be viable even with non-trivial set-up/running costs (and the prospect of being able to run certain expenses through the company is also attractive).
There's actually a reasonable excuse for wanting to trade through a limited company - limiting personal exposure when trading derivatives.
Maybe I should just ping HMRC and say:
- I'm thinking of setting up a limited company whose business would be derivatives trading.
- The reason for doing this through a limited company is to limit my personal liability.
- The plan would be to invest cash or assets into the company, and
- the company would trade derivatives using the cash or assets as collateral,
- which would generate revenue for the company from capital gains.
- The plan is to pay myself a salary (and maximise the employer's pension contribution).
- Any profits will either be paid out as dividends or retained within the company to invest further.
- Is that okay?
Worst thing they could do is say "No.", in which case I get to have a fun argument with them (or I guess they could say "We can't advise you..."

I guess I also need to assess the risk of double taxation in the event of larger-than-expected gains (e.g. paying corp tax on annual gains in excess of £65k p.a., and either income tax on distribution as dividends, or CGT on a capital distribution)...
I'm not a tax advisor but have some experience of this.
Fundamentally it depends on whether your activity meets the HMRC definition of investing or trading.
In extremely simplistic terms, holding an asset permanently, and receiving interest/dividends/rent from it meets the definition of investing. Buying an asset (a crate of apples for a greengrocer, building material for a property developer, a single option or spread for YourCo perhaps) for short-term speculative gain does not.
HMRC accepts that there are a range of costs that you might incur to support your trading activity (data fees, research, Bloomberg terminal etc) that you would not incur if holding an investment.
A quick google for "accountant for options trader" or similar will produce a few who specialise in this kind of thing and would be happy to help you structure something.
Fundamentally it depends on whether your activity meets the HMRC definition of investing or trading.
In extremely simplistic terms, holding an asset permanently, and receiving interest/dividends/rent from it meets the definition of investing. Buying an asset (a crate of apples for a greengrocer, building material for a property developer, a single option or spread for YourCo perhaps) for short-term speculative gain does not.
HMRC accepts that there are a range of costs that you might incur to support your trading activity (data fees, research, Bloomberg terminal etc) that you would not incur if holding an investment.
A quick google for "accountant for options trader" or similar will produce a few who specialise in this kind of thing and would be happy to help you structure something.
Edited by sideways sid on Thursday 9th October 13:55
I've researched this in the past and my conclusion was that if you set up a company to trade things like options, it could constitute a trading activity and not investment.
this seems to be ok for some tax purposes, but not all. ie., unlikely to qualify for bpr etc.
it'd be a god idea to document your activities much like a business plan, outlining strategies employed etc as evidence that you're trading.
this seems to be ok for some tax purposes, but not all. ie., unlikely to qualify for bpr etc.
it'd be a god idea to document your activities much like a business plan, outlining strategies employed etc as evidence that you're trading.
Panamax said:
They will 99.9% tell you to go and pay for professional advice.
Well, we'll see. It's been suggested that I should submit a "non-statutory guidance" application. I'm going to wait for the upcoming isleofthorns said:
I've researched this in the past and my conclusion was that if you set up a company to trade things like options, it could constitute a trading activity and not investment.
this seems to be ok for some tax purposes, but not all. ie., unlikely to qualify for bpr etc.
it'd be a god idea to document your activities much like a business plan, outlining strategies employed etc as evidence that you're trading.
Good advice, thank you! Researching the relevance of the business plan aspect led me to the judgments in Akhtar Ali's and Rajesh Gill's appeals. Funny how those cases don't appear on the list of relevant cases in HMRC's manual... this seems to be ok for some tax purposes, but not all. ie., unlikely to qualify for bpr etc.
it'd be a god idea to document your activities much like a business plan, outlining strategies employed etc as evidence that you're trading.

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