How to invest in another company tax efficiently

How to invest in another company tax efficiently

 

Picture the scene; you have a friend that has offered you shares in their own company. You want to invest, but is it more tax efficient to purchase them through your Limited Company, or personally?

 

Duncan Strike, Director of Intouch Accounting, explores below what it really means to invest in another company tax efficiently, and how to ensure you come out better off.

 

Tax: investing in a private company

When buying ordinary shares in a company you have two opportunities to make money:

 

1. As an income (in the form of dividends)

2. An increase in share value

 

Should you personally purchase the shares, dividend tax will apply on dividends and capital gains tax (CGT) on increased share values. The position of tax is different when you invest through your company; the dividends the company receives are normally exempt from Corporation Tax, and it pays corporation tax on any increases in the share value.

 

Tax on dividends

6 April 2016 saw many changes for individuals, but remained untouched for companies. With that in mind, the differences for individuals and companies are irrelevant should your company receive the dividends then pass them onto you.

 

Beware! Your company will not pay any tax on dividends but as soon as they are passed to you, you will have to pay tax on them in the normal way.

 

Remember: During the period where your company retains dividends but does not pass them onto you, it will not have to pay tax on those dividends. So effectively your company could store up your dividends, and then you only pay tax on them once you receive them.

 

Tax: capital growth

If you personally own the investment shares, you’ll only have to pay CGT on any growth in value at the point when you sell them. The position is traditionally the same if your company owns them (i.e. it will pay the CT owed on capital growth when it sells them).

 

However, bear in mind that different rates, reliefs and allowances apply, which can in turn make the tax bill for personal ownership completely different from that payable with company ownership. These include the CGT personal allowance, entrepreneurs’ relief and the new Investors’ Relief.

 

Beware! In respect of the increased value of shares, it is near impossible to be certain if personal or company ownership will result in the lowest tax bill, until all the circumstances are known and the entitlement to relief is established. But remember that by personally owning shares, it will avoid the double taxation which can apply with company owned investments.

 

For example: You use your company to buy 1,000 shares, costing £10,000, in your friend’s company. After five years your friend’s company’s shares are worth £50,000. Ignoring CGT reliefs your company pays CT at 18%, on the £40,000 gain (ie £7,200). When the net amount of £32,800 is paid to yourself, you will have to pay personal tax on it, even though your company has also already been taxed. This could result in an overall tax rate of up to almost 51%.

 

Income vs capital growth

Personal ownership is likely to result in a lower tax bill on capital growth, whereas the tax position for dividends favours company ownership. It’s worth considering whether your company or you personally should invest based on what type of return you can expect – capital growth or dividends.

 

Confused by investments?

You’re not alone! That’s why it’s always important to run your plans past your Personal Accountant to ensure you’re on the right track to achieving your Limited Company contracting aspirations.

 

Are you still hunting around for the perfect contractor accountant? Why not speak to our team of expert advisers today, who will run you through our monthly all inclusive service, that’s tailored to the needs of Limited Company contractors. We look forward to hearing from you!

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Dividends – how often should I take them, and when are they actually taxed?

Dividends

Dividends can sometimes be difficult to understand and many contractors find themselves wondering when they should take them and when do they actually get taxed?

 

In this blog our Director, Duncan Strike answers these two questions and covers the timing and tax point of dividend declarations.

 

Question 1: When are dividends taxed? Is it when they’re paid, or the date they’re declared?

 

Neither of these answers are correct. A dividend will be included on your tax return, according to the date the dividend was declared as becoming payable. The date it was paid is not relevant.

 

For example:

A dividend declared 1 April 2016, that was paid on 7 April 2016, is included as income for the 2016/17 tax year. The amount would be classed as a loan, if it was paid on 4 April, until 7 April. It would not change the tax year it’s regarded as a dividend.

 

Remember! Should HMRC decide to investigate, in order to support all dividends, keep copies of all dividend vouchers and minutes. Your contractor accountant should have a dividend template for you to use, then simply send them a copy every time you use it.

 

Tax planning opportunities

If you have some of your basic rate tax band left, have sufficient profits in your company and for whatever reason, you don’t want to pay yourself a dividend at that time, you’re able to declare a dividend immediately payable, if you intend to take the cash at a later date. This means you can fully utilise your tax allowances year on year, as it ensures the dividend falls into a specific tax year.

 

Don’t forget that as of 6 April, the new £5,000 dividend tax was introduced. It’s worth taking at least £5,000 in dividends, as this amount is tax free, regardless of which tax band you fall into. Use our new dividend calculator to find out how much you’ll pay in dividend tax this tax year.

 

Question 2: How often should you pay yourself dividends? What are the dangers of monthly payments looking like disguised salary?

 

We generally recommend our clients to pay themselves dividends, either monthly or quarterly. You can, however, pay them to yourself whenever you wish.

 

As long as the correct dividend voucher and minutes paperwork are in place and your company has sufficient funds to cover the distributions, there’s little chance that HMRC will see your dividends as salary.

 

We do advise all clients to keep their salary and dividend payments completely separate from one another and pay all shareholders separately in the correct proportions, so that a clear audit trail can be provided. Should you be subject to an HMRC review, having clear audit trails in place can make all the difference, as every item is easy to trace and nothing has been missed or hidden.

 

If you’re looking for specialist, tailored advice regarding dividends, that’s unique to you and your circumstances, speak to our team today to find out how Intouch can help you. Our Personal Accountants are here to be your guide, to ensure you get the best and most from contracting.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.