a private investment company


a private investment company

Postby tangent on Thu Jun 10, 2010 11:26 pm

I am considering setting up a limited liability company to manage some investments on my wife and my behalf. The company would be run along the lines below. The purpose of the company would be to provide future retirement income. I would welcome comments on any aspect of this, but please don’t tell me about ISAs and pensions as I am already investing in these.

My limited liability company would
- Be incorporated with £100 of capital
- Receive a Director’s loan from me/my wife of about £100,000 – possibly more
- Invest primarily in UK shares of high dividend paying companies and investment trusts
- Hold investments for the long term, i.e. at least 5 years.
- We would not draw any income from the company under PAYE, unless there was a good reason to do so.
- We would not draw any dividends from the company in the early years. The aim would be to eventually draw dividends as part of retirement income.
- I would probably seek to withdraw all of my Director’s loan prior to withdrawing dividends

I understand from what I have read that the company would be classified by HMRC as a close investment holding company. My understanding of the tax implications of this are that
- The company would pay standard rate corporation tax on profits, i.e. would not pay the smaller companies rate
- Disposal of shares would be subject to corporation tax instead of capital gains tax, but taper relief would be available
- Dividends from investments would not be subject to corporation tax
- Apart from the £100 share capital and Director’s Loan, all of the built up funds would be classified as distributable reserves and so could be paid out as dividends.

What I am not clear about are the following:
- Is there anything in the above that HMRC would take a dim view of and rule I was in breach of some obscure bit of tax legislation?
- I am in the fortunate position of having a flexible mortgage that is fixed at 0.5% above Bank Of England base rate – i.e. currently 1%. If I used this facility to make an additional loan into the investment company, would I be entitled to income tax relief on this? E.g. if I borrowed £100,000 at 1%, could I claim £1,000 income tax relief? If so, how would I go about providing the evidence of this to HMRC? Would I instead have to take out a second mortgage specifically to make the loan?
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Re: a private investment company

Postby section 44 on Fri Jun 11, 2010 5:31 pm

A lot of info and a lot of issues. My initial (gut) reaction is why would you want to do this? The company creates an additional layer of tax and I'm struggling to see the benefits of this proposed structure.

By the way - no taper relief.

SIPP?
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Re: a private investment company

Postby tangent on Fri Jun 11, 2010 7:42 pm

Not taper relief, but something similar - Indexation Relief. This can be used to adjust the purchase price of an asset for inflation. Corporation tax is only paid on inflation adjusted increases in value.

The reason for doing this is tax efficiency. The company receives dividends that do not attract corporation tax. These can be accessed tax free by reducing the Director's Loan. Once the Director's Loan has been repaid (We are talking 10+ years here), remaining assets can be withdrawn as dividends, which would only attract additional tax for higher rate tax payers. I would hope to be in retirement by this stage and would arrange my finances so I was not a higher rate tax payer. Unlike a SIPP, I have complete control over the assets. I can chose to sell shares (and take a possible CT hit), give away shares in the investment company itself or pass it on to heirs, which may be subject to IHT of course. If I invest directly in shares, at present I would end up paying additional income tax on the dividends.

Running a company is not difficult - I already do that. This sort of company would not need to mess about with VAT or PAYE either.

I already have a SIPP and pay the maximum I can into ISAs. SIPPs are not as flexible as this investment company approach and are likely to become tax inefficient for higher rate tax payers after the next budget.
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Re: a private investment company

Postby AvocadoK on Sat Jun 12, 2010 8:32 am

1. I don't think you are in breach of any obscure bit of tax legislation. It would be a close investment company, as you say.
2. There is no tax relief on borrowings used to make a loan to a close investment company.
3. If you make gifts of shares in your close investment company, you may trigger a capital gain on those shares. There is no holdover relief for shares in non trading companies if the gift is made to an individual. Holdover relief for gifts to trusts is possible, but you have to watch that you don't trigger a charge to inheritance tax (basically you can make gifts up to the nil rate band (£325k currently) to a trust over a seven year period without incurring immediate IHT bills).

Don't forget that you will have to submit accounts / CT comps in iXBRL format after March 2011.

AK
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Re: a private investment company

Postby tangent on Sat Jun 12, 2010 11:05 am

Hi AvocadoK,

thank you for your comments. I thought that getting tax relief as well sounded too good to be true!

Thanks for pointing out the CGT issue for gifts as well - this had slipped my mind. Perhaps better to withdraw dividends and give these away, up to annual exemption limits, or give away small numbers of shares over time, so as not to breach the annual exemption limit (assuming there still is such a thing after June 22).

I was concerned that there might be funny rules about not drawing a salary, etc.

Perhaps when I retire, I could draw a small salary from the investment company for managing the assets. This might offset some CT on any share disposals. Would this be ok?
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Re: a private investment company

Postby AvocadoK on Sat Jun 12, 2010 11:21 am

Yes, you should be able to pay a small salary and reduce the CT on gains.

You might consider putting some shares in the names of adult children from the outset, while there is no value, rather than making gifts later.

AK
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Re: a private investment company

Postby JonWB on Fri Jun 25, 2010 11:08 pm

Some US brokerages (e.g. interactivebrokers) will allow you to borrow 50% of your corporate shareholding. This allows you to gear up. The funding costs do then become a cost to the business. So, you do this:

(1) £100 share capital
(2) £100,000 Director Loan to Company (no interest)
(3) £100,000 Brokerage Loan to Company (LIBOR + 1.5%)

Total Share Investment: £200,000

The reason (2) has to be 0% interest is that you don't want the interest to be classed as a distribution. No danger of that when 0%. Also as (3) is a loan from the Brokerage to the Company, it is a commerical arrangement and those funding costs are tax deductable.
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Re: a private investment company

Postby JonWB on Fri Jun 25, 2010 11:31 pm

You have a problem with the Directors Loan:

See this link:

http://www.hmrc.gov.uk/manuals/ctmanual/CTM61050.htm

For a Close Investment Company (CIC) HMRC class any loan repayment as income as long as there are distributable reserves.
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Re: a private investment company

Postby twitterati on Thu Oct 16, 2014 4:07 pm

JonWB wrote:You have a problem with the Directors Loan:

See this link:

http://www.hmrc.gov.uk/manuals/ctmanual/CTM61050.htm

For a Close Investment Company (CIC) HMRC class any loan repayment as income as long as there are distributable reserves.

JonWB,
You had me worried for awhile, but I don't think your most recent post is correct. Reading the link you sent, my understanding of this is that it is not relevant to the original post. The link you sent refers to capital payments to settlors. Settlors of trusts. The OP did not mention anything about creating a trust.
Would you agree?
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Re: a private investment company

Postby King_Maker on Fri Oct 17, 2014 9:19 am

I am not sure you will get a response for a 4 year old thread. :)
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