Investment Structure/Tax

[jamesross1986]

Hi everyone

I have been working in finance as an employee for over 7 years and have recently managed to secure about £800k of funding from friends and family to invest in unquoted UK investments. I have secured the investment and know the types of investment and returns I am looking for but I have to be honest with you that I have no idea how to go about in setting up a structure to deal with this and receive the money from my investors.

Someone told me a few weeks ago that I should consider creating an Ltd for this purpose. I would like to know that what exactly needs to be done in this case. For instance, do the people who invest become shareholders and I become the secretary of the company? If so, how will I get the commissions I plan to charge my investors and pay a corporation tax on them if I'm a secretary to the Ltd and not an actual shareholder. I don't want to go through a fund structure and would like to keep things as transparent and simple as possible.

I would appreciate if anyone could share their thoughts on this.

Regards

James

[TN]

Hi there

Typically for investing in unquoted investments (i.e. Private Equity) you would use a partnership structure. This should be transparent for tax purposes - i.e. It won't pay any tax itself but the investors pay tax on the profits. This also allows the investors to retain capital gains tax treatment of capital profits. Typically a limited partnership is used which gives the investors limited liability - either an English or Scottish LP or an offshore LP (Jersey, Guernsey, Cayman etc).

You would have your own vehicle (limited co or another partnership - typically an LLP) to receive your share of the commission and profits. PE managers typically make their money as fees, carried interest (a share of the profits without having to make any substantial investment) and co-invest (investing their own money alongside the investors). If structured correctly the carry and co-invest would attract CGT treatment.

You could go down the limited company route which is quick and easy to set up but it will pay corporation tax on its profits and then the investors will suffer tax on their extraction of the profits - which will cost more in tax terms overall. You would likely create different classes of shares - non-voting shares for the investors and voting shares for yourself so you control the company. You would be a director and shareholder and receive your commissions as salary/bonus/dividends. A limited co could work well if you were going to do something that attracted EIS relief but this will depend on exactly what your underlying investments are.

The problem with ventures like this is it will be expensive to do it properly. There will be lots of FCA issues to think about and as you're investing other people's money they will be relying on you to tell them what they need to report on their tax return (big funds spend fortunes on investor reporting). You also need to ensure there is robust legal documentation in place governing how the structure will work and what you can and can't do with and without investor approval to avoid arguments down the line if they want their money back while all the investments are illiquid.

There have also been many changes to the taxation of managers' fees and carry etc over the past few years which you will need to navigate carefully to avoid you paying too much tax on your share of the returns.

I'd be very interested in having a discussion on how to set this up. Or meeting to discuss over a coffee if you're in London. Let me know if you're interested.