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.