Investing company dosh
Discussion
Are there any restrictions on what a business does with retained profits?
At the moment our limited company is getting 5.7% gross on our business reserve account, whereas investing that in say commercial property or share in other comanies MAY bring in more. I am aware that investing in property has its own implications ( ie are we a property investment company?) but are there any other options other than sitting on it or using it to grow our own business?
At the moment our limited company is getting 5.7% gross on our business reserve account, whereas investing that in say commercial property or share in other comanies MAY bring in more. I am aware that investing in property has its own implications ( ie are we a property investment company?) but are there any other options other than sitting on it or using it to grow our own business?
What we've done is form an investment company which is entirely separate from our trading company. We simply transfer surplus capital from our trading company to the investment company which has investments (cash, property, etc...)
The reason we do this is that if there are large investments in our trading company these become vulnerable should the company ever get into trouble. As such, we ringfence them by putting them in an investment company that has no debtors or creditors. Also, there is no ambiguity as to whether the trading company is an investment company, which could otherwise have Tax implications if we ever chose to sell the company.
Also, some new properties have VAT attached to the price tag. The investment company is VAT registered so it makes claming that back simpler. Additionally, if we owned our buildings privately we'd need to pay ourselves bonuses almost double the value of the building (because of Tax) in order to buy the properties.
Lastly, it's not always a bad thing to have some surplus cash sloshing around it's what I call "sleep money". You haven't got to worry about cash-flow. That said, you can also become a little lazy and not control your costs, so it requires discipline to have good housekeeping.
The reason we do this is that if there are large investments in our trading company these become vulnerable should the company ever get into trouble. As such, we ringfence them by putting them in an investment company that has no debtors or creditors. Also, there is no ambiguity as to whether the trading company is an investment company, which could otherwise have Tax implications if we ever chose to sell the company.
Also, some new properties have VAT attached to the price tag. The investment company is VAT registered so it makes claming that back simpler. Additionally, if we owned our buildings privately we'd need to pay ourselves bonuses almost double the value of the building (because of Tax) in order to buy the properties.
Lastly, it's not always a bad thing to have some surplus cash sloshing around it's what I call "sleep money". You haven't got to worry about cash-flow. That said, you can also become a little lazy and not control your costs, so it requires discipline to have good housekeeping.
As long as it's not illegal - or doesn't contravene the terms set out in the Company's Memorandum and Articles of Association, then it can do what it wants with its money.
As you've pointed out, if it starts earning too much from its investments (compared to its trading activity) it might lose its Small Trading Company status for Corporation Tax purposes.
As you've pointed out, if it starts earning too much from its investments (compared to its trading activity) it might lose its Small Trading Company status for Corporation Tax purposes.
Interesting question. But how do you manage the transfer of funds from the trading to the investment co. Is it classed as a loan or does the investment co. 'gift' the money? I'm confused by this bit. p.s. if it is a loan how is the commercial rate of interest covered?
Edited by Olf on Wednesday 3rd October 08:53
The problem of reclassification of a company from a "trading" company to an "investment" company arises when too much of the trading company's income starts being derived from investment activities rather than trading activities.
Obviously, if you set up a separate investment company - the new company is straight away classified as an "investment" company for Corporation Tax purposes.
There could also be Capital Gains Tax problems for someone disposing of an investment company. Capital Gains Tax treats the disposal of business assets more favourably than non-business assets. An investmnent company is technically a non-business asset as it isn't engaged in a trading activity.
Obviously, if you set up a separate investment company - the new company is straight away classified as an "investment" company for Corporation Tax purposes.
There could also be Capital Gains Tax problems for someone disposing of an investment company. Capital Gains Tax treats the disposal of business assets more favourably than non-business assets. An investmnent company is technically a non-business asset as it isn't engaged in a trading activity.
Here's an e-mail I sent last night regarding a client who wanted to buy a property in the company. Not strictly appropriate to your case, but offers some guidance.
Futher to our telephone conversation earlier, I’ve
> tried to summarise as
> best as possible, but as I mentioned, it gets quite
> complicated.
> You are considering the possibility of using profits
> for property
> investment within the company. You have
> approximately £30,000 to
> transfer into the company, and you’re looking at a
> purchase ceiling of
> around £100,000.
> Investing via your limited company means losing out
> on taper relief and
> both your and X's capital gains allowances
> (currently £9,200 per
> year each)
> By holding the property within the company it makes
> your holding of the
> company’s shares a non-business asset which only
> attracts a maximum of
> 40% taper relief on the disposal should you ever
> sell the company. It
> also means that the property itself would only
> attract relief against
> capital gains tax at the rate of inflation rather
> than the non-business
> asset taper relief which builds at a currently
> faster rate to 40% over
> ten years.
> It’s being considered as a long term investment, so
> when the property is
> sold, you will pay tax on the proceeds, as the
> company will have to pay
> tax on the capital gain (increase in value over
> puchase cost), and if
> you then wish to extract the profit from the
> company, you will need to
> pay further personal tax on the income or gain
> arising probably at
> higher rates. You are therefore only saving paying
> the tax until a
> later date.
> Having the rented property within your company, it
> might be awkward when
> you need the company dissolved. Prior to
> dissolution, the property would
> need to be transferred out of the company, which
> would crystallise any
> capital gains, stamp duty and legal costs on
> transfer prior to any
> intention of yours to selling.
> We also briefly mentioned the company ‘trading’ to a
> point where, you
> would renovate a property and sell on for a profit.
> Perhaps by way of
> some agreement with your brother.
> As a property development company as well as your
> current trading
> activity, this would need to be reflected in the
> accounts of the company
> and separate profits calculated for both activity.
> The tax position of
> the company will also be more complicated, in
> particular is one trade
> results in a loss and the other in a profit. But
> this is something we
> can perhaps discuss later.
>
> I would also need to check the memorandum and
> articles of the company to
> ensure that this type of activity is allowed.
>
> Other points that I thought to mention, are that
> property transactions
> are normally exempted from VAT and, even though
> company is VAT
> registered regarding its current trading, you will
> not necessarily have
> to charge VAT on the property income. Obviously,
> you cannot claim back
> VAT on property related costs either. As you would
> have VAT exempt
> income, this may affect your flat rate VAT scheme
> payments, but this is
> something we would need to look into.
> I don’t know how insurance would work either. If
> the company had any
> issues with respect to, say the company was being
> sued. The property
> would potentially be lost. Whereas keeping it in
> personal names would
> limit the damage to the company alone, and not any
> assets.
> Finally, mortgages for a property through a limited
> company may be
> difficult to secure, but a bit of quick ‘googling’
> came up with Paragon,
> Mortage Express and CHL Mortgages. However, they
> all may require a
> charge on you personally anyway, negating the effect
> of a limited
> company anyway.
> In my opinion you would be best to keep the purchase
> of the property in
> your personal names. It may be that your personal
> circumstances and
> future plans would make it appropriate for an
> investment property to be
> placed within a limited company, but perhaps this
> should be a separate
> limited company set up for the specific purpose of
> property investment.
> The only benefit I can see regarding purchasing the
> property in the
> company is that you might need to extract additional
> funds from the
> company to buy it in the first place should it be in
> your own name.
> I will speak to X regarding this, because
> there may be some
> advantages gained through tax planning that I am
> unaware of, and perhaps
> X could give you a call, but I think I’ve covered
> most points.
>
Futher to our telephone conversation earlier, I’ve
> tried to summarise as
> best as possible, but as I mentioned, it gets quite
> complicated.
> You are considering the possibility of using profits
> for property
> investment within the company. You have
> approximately £30,000 to
> transfer into the company, and you’re looking at a
> purchase ceiling of
> around £100,000.
> Investing via your limited company means losing out
> on taper relief and
> both your and X's capital gains allowances
> (currently £9,200 per
> year each)
> By holding the property within the company it makes
> your holding of the
> company’s shares a non-business asset which only
> attracts a maximum of
> 40% taper relief on the disposal should you ever
> sell the company. It
> also means that the property itself would only
> attract relief against
> capital gains tax at the rate of inflation rather
> than the non-business
> asset taper relief which builds at a currently
> faster rate to 40% over
> ten years.
> It’s being considered as a long term investment, so
> when the property is
> sold, you will pay tax on the proceeds, as the
> company will have to pay
> tax on the capital gain (increase in value over
> puchase cost), and if
> you then wish to extract the profit from the
> company, you will need to
> pay further personal tax on the income or gain
> arising probably at
> higher rates. You are therefore only saving paying
> the tax until a
> later date.
> Having the rented property within your company, it
> might be awkward when
> you need the company dissolved. Prior to
> dissolution, the property would
> need to be transferred out of the company, which
> would crystallise any
> capital gains, stamp duty and legal costs on
> transfer prior to any
> intention of yours to selling.
> We also briefly mentioned the company ‘trading’ to a
> point where, you
> would renovate a property and sell on for a profit.
> Perhaps by way of
> some agreement with your brother.
> As a property development company as well as your
> current trading
> activity, this would need to be reflected in the
> accounts of the company
> and separate profits calculated for both activity.
> The tax position of
> the company will also be more complicated, in
> particular is one trade
> results in a loss and the other in a profit. But
> this is something we
> can perhaps discuss later.
>
> I would also need to check the memorandum and
> articles of the company to
> ensure that this type of activity is allowed.
>
> Other points that I thought to mention, are that
> property transactions
> are normally exempted from VAT and, even though
> company is VAT
> registered regarding its current trading, you will
> not necessarily have
> to charge VAT on the property income. Obviously,
> you cannot claim back
> VAT on property related costs either. As you would
> have VAT exempt
> income, this may affect your flat rate VAT scheme
> payments, but this is
> something we would need to look into.
> I don’t know how insurance would work either. If
> the company had any
> issues with respect to, say the company was being
> sued. The property
> would potentially be lost. Whereas keeping it in
> personal names would
> limit the damage to the company alone, and not any
> assets.
> Finally, mortgages for a property through a limited
> company may be
> difficult to secure, but a bit of quick ‘googling’
> came up with Paragon,
> Mortage Express and CHL Mortgages. However, they
> all may require a
> charge on you personally anyway, negating the effect
> of a limited
> company anyway.
> In my opinion you would be best to keep the purchase
> of the property in
> your personal names. It may be that your personal
> circumstances and
> future plans would make it appropriate for an
> investment property to be
> placed within a limited company, but perhaps this
> should be a separate
> limited company set up for the specific purpose of
> property investment.
> The only benefit I can see regarding purchasing the
> property in the
> company is that you might need to extract additional
> funds from the
> company to buy it in the first place should it be in
> your own name.
> I will speak to X regarding this, because
> there may be some
> advantages gained through tax planning that I am
> unaware of, and perhaps
> X could give you a call, but I think I’ve covered
> most points.
>
coyft said:
srebbe64 said:
What we've done is form an investment company which is entirely separate from our trading company. We simply transfer surplus capital from our trading company to the investment company which has investments (cash, property, etc...)
How do you do that then? 
I don't quite understand how one co. can just hand over it's suplus to another co. You could get up to all sorts of naughtiness like double dipping on tax breaks for home offices and stuff. It just seems too open to abuse.
srebbe64 said:
The reason we do this is that if there are large investments in our trading company these become vulnerable should the company ever get into trouble. As such, we ringfence them by putting them in an investment company that has no debtors or creditors.
Is this the case though. Your investment company would have your main company as the only shareholder, so it would be an asset of your main company, hence you can transfer assets. However, if your main company was liquidated, why would your investment company not also be sold because it is an asset of your main company?Gassing Station | Business | Top of Page | What's New | My Stuff