Taxation of investment gains in a limited company

[mikeroberts]

Hello,

I run a one-man limited management consultancy company. I don't draw salary, preferring to leave cash in the company.

If the company invests, say, £5,000 in a unit trust and at the end of the accounting year the units are worth £6,000 (ever the optimist!):

a) in the accounts must I show the value as £6,000 or can I show the value as the original £5,000 cost?

b) if I must show £6,000 does this mean I must pay corporation tax on the £1,000 unrealised gain?(Company profit will exceed the £10K threshold.)

c) ideally I'd pay no tax on unrealised gains, then realise the gains in a year when profits, including the gains, were below £10K and thereby avoid tax on the gain altogether. Or am I living in cloud cookoo land?

d) maybe there are other options I haven't thought of...?

Mike

[accountant@uktaxshop]

Mike,

a) You could have a policy of revaluing you assets to the balance sheet date, or just leave them at historic cost. This wonÂ’t affect your tax bill (b)

b) You are only taxable on the gain arising, i.e. when you sell, after taper relief etc.

c+d) sort of. You have to remember that all the money in your company has to (presumably!) come out some way or other.

If you are a lower rate tax payer, there is no extra tax on dividends, so it wonÂ’t make a lot of difference for extraction.

If you are a higher rate tax payer however you will pay an effective 25% on taking the monies out as a dividend. (I wonÂ’t get into the liquidation route, and assume divis only).

Therefore any gain you make within the company will attract a tax on distribution, regardless of if it was exempt in the co.

If you made the gain as an individual, there would be no tax on the first £7900 of realised gain (i.e. your annual personal allowance), so it might be more efficient making the gain outside the co.

What works for you will depend on your individual circumstances.

One other thing worth pointing out is if you don’t have any other form of salaried income, taking a small salary equivalent to your personal allowance is a nice way of not paying any corp (or divi) tax if your company makes more than the £10,000 in the year. Although you do of course need to do it properly.

There are also some other issues to do with trading and non-trading companies to consider, in short (and please donÂ’t treat this as anywhere close to definitive) if you have too much investment (20% of income or assets) you will lose your right to taper and other capital reliefÂ’s on sale or liquidation of your company.

Please let me know if you would like a free consultation.

Regards

James Smith
Chartered Accountant
www.uktaxshop.co.uk
01284 764436

[accountant@uktaxshop]

Sorry,

I just re-read that, regarding the salary route, I should have said "other form of non-dividend income" not "other form of salaried income".

[mikeroberts]

James,

Many thanks. I'm a 40% taxpayer due to pension income which is why I'm not taking salary or dividends out of the company.

You say "There are also some other issues to do with trading and non-trading companies to consider, in short (and please don’t treat this as anywhere close to definitive) if you have too much investment (20% of income or assets) you will lose your right to taper and other capital relief’s on sale or liquidation of your company."

To be sure I understand: does this mean (broadly)if income from investments exceeds 20% of total turnover that taper relief etc is lost?

And: the company has no tangible assets other than cash in the bank. If I invest more than 20% of this cash in, say, a unit trust, would I lose taper relief etc because more than 20% of the assets would then be investments?

Maybe I should just leave the cash in the bank until my tax rate falls below 40% or I eventually liquidate!

Mike

[accountant@uktaxshop]

Mike,

This is actually quite a large topic, but as a slightly longer summary if you cant show that "substantial" investments you are making with your surplus cash are for the benefit of the trade (i.e. you are going to buy something in the future for your trading business, and donÂ’t have the funds yet) you run the risk of losing your taper relief. From memory I think it is reset, and you have to wait 3 years for the full 75% relief to be available again once you donÂ’t have "substantial" investments.

For more details you can look at the IR manual to the inspectors on the topic.

http://www.inlandrevenue.gov.uk/manuals ... 17953p.htm


Regards

James Smith

[mikeroberts]

James,

Many thanks. Had a look at that manual - interesting and it raised many questions.

Is it in principle this simple? My company has 2 shares, I own one, my wife owns the other. We each subscribed £1 for our share. If I wind up the company - and it qualifies as a trading company - and say there are assets (cash) of £20,002 we each get £10,001 and pay CGT on the £10,000 gain less £7,900 allowance i.e. on £2,100. And if this was after 4 years, taper relief would mean CGT is actually payable on only 25% of this, i.e. on £525. Sounds too good to be true…!

Can you point me to an IR manual (or other info) which explains about voluntarily winding up a small company and distributing the assets and the tax that arises? Have spent ages searching the Inland Revenue site but darned if I can find what I'm looking for.

Thanks again.

Mike

[accountant@uktaxshop]

Mike,

Its actually better than that

You can apply the taper relief before your allowance:

ie 10,000*0.75= 2,500, which is covered by your allowance. ie no tax.

Which again is why you dont want to become non-trading. The max relief falls to 40%, and only after 10 years. Although of course if the real figures are as small as in your example, it might not actually be a problem being non-trading.

The best route will always depend on your individul circumstances.

IR winding up manual is at

http://www.inlandrevenue.gov.uk/manuals ... cont9d.htm

James