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Where Taxpayers and Advisers Meet

Corporate Investment Bonds - Trading or Investment?

marc02
Posts:94
Joined:Wed Apr 22, 2009 2:46 pm
Corporate Investment Bonds - Trading or Investment?

Postby marc02 » Thu Sep 27, 2018 10:16 am

Where a company could be classed as a "trading" company rather than an "investment" company, BUT they purchase Corporate Bonds, which are within an insurance wrapper (https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/corporate-owned-bonds/) AND the amount held in the bond becomes their greatest asset, would HMRC move to treat the company as an investment company?

Presumably if the company purchased funds (EFT or Unit Trusts) directly without a bond wrapper, and those fund values were to outweigh any other business activity HMRC would deem the company a holding / investment company. Would that be the same where the funds are in bond?


For some broader context, the company concerned owns and lets residential property. The company actively runs the business and there are no agents involved. Their effort is significant and there is a strong argument that they are therefore a trading company. They now intend on maintaining their operations, but investing in a bond - which by its nature they would be passively holding. They want to be careful that the investment does not cause them to become classed as an investment company especially since their existing situation is already questionable (although likely weighted in their favour).

marc02
Posts:94
Joined:Wed Apr 22, 2009 2:46 pm

Re: Corporate Investment Bonds - Trading or Investment?

Postby marc02 » Fri Sep 28, 2018 9:16 am

As I now understand it (but happy for comments) just because the investment is inside an Insurance Wrapper, HMRC will still consider it an investment and CT will be due using the fair or historical accounting respectively. Therefore an investment asset that shifts the weighting of the coming to investing rather than it's core activity is likely to see it considered by HMRC as an investment company and no longer a trading company.

marc02
Posts:94
Joined:Wed Apr 22, 2009 2:46 pm

Re: Corporate Investment Bonds - Trading or Investment?

Postby marc02 » Fri Sep 28, 2018 11:20 am

Also worth noting as I understand that an "excepted asset" would not qualify for BPR and would be liable to IHT.


From Prudential guide "Cash is as much an ‘excepted asset’ as a bond – so switching from cash to a bond (or vice versa) should have no effect on availability of BPR." A further interesting note from the same source: "unless there is evidence which directs us to the fact that the cash is held for an identifiable future purpose, then it is likely it will be treated as an excepted asset. Therefore the holding of funds as an 'excess buffer' to weather the economic climate is not a sufficient reason for it not to be classed as an excepted asset."

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: Corporate Investment Bonds - Trading or Investment?

Postby AGoodman » Mon Oct 01, 2018 11:54 am

Trading vs investment for which tax? The definitions are different.

I cannot see the company qualifying for BPR at all given the definition. If the majority of its income is rental income from its own properties then it is in the business of making and holding investments.

marc02
Posts:94
Joined:Wed Apr 22, 2009 2:46 pm

Re: Corporate Investment Bonds - Trading or Investment?

Postby marc02 » Tue Oct 02, 2018 10:08 am

I know there is a 20 hour a week guide to qualify for CGT holdover. Where the company employs staff, easily spends 20+ hours per week consistently over several years would there not be a case for BPR so far as IHT is concerned? Or would HMRC rather the business is liquidated and employees made redundant?

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: Corporate Investment Bonds - Trading or Investment?

Postby AGoodman » Tue Oct 02, 2018 12:53 pm

The BPR "wholly or mainly" test operates by looking at the business in the round but if all, or most, of the income is rental income, it will be an investment business for BPR purposes.

There may be people working but unless they are generating trading income from other activities (which probably needs to be greater than the rental income) they are still working for an investment business.

As to your final question, HMRC are responsible for the majority of the winding up petitions in the UK.

The CGT test is different but if you are thinking of using holdover relief I would make sure you get some advice first as I had thought that if non-trading activities (such as lettings) are over 20% of the business then that will usually rule out the relief. Having staff does not mean that a company is trading. The exception is for furnished holiday lets which are deemed to be trading so if that is your business, you could well be fine for CGT.

marc02
Posts:94
Joined:Wed Apr 22, 2009 2:46 pm

Re: Corporate Investment Bonds - Trading or Investment?

Postby marc02 » Tue Oct 02, 2018 2:14 pm

Thank you. Helpful.

(I am surprised (although I probably shouldn’t be) that the BPR would not be available where it resulted in continuous employment and continuous living accommodation).


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