Investing surplus company funds

[blore]

I trade via limited company.

The company has surplus funds which i cannot withdraw as I would be liable to higher rate income tax.

Thus, I wish to invest the surplus company funds in global mutual funds via UK broker houses.

What is the capital gains tax position? Also would the status of my company been questioned as an investment company as opposed to trading company.

[bob.fraser@towrylaw.]

Firstly, you are correct to be looking at "mutual funds" (unit trusts/OEICS)for the investment rather than investment bonds since the pre-budget statement has announced that these will be taxed under the loan relationships legislation (as capital redemption bonds are).
The taxation on unit trusts is still favourable to limited companies. These are the tax features:
1. There is no capital gains tax on the unit trusts. Realised gains are taxed on the company at corporation tax rates when the investment is encashed in whole or in part.
2. Distributions received by the company may be taxable depending on the type of income received by the unit trust.
3. Indexation (the annual increase in the RPI) is still allowable for gains made by companies. This means that the capital gain that is subject to tax excludes any increase in value owing to inflation.
4. As the investment in open-ended, it can be encashed at any time, including in those years where the company is making a loss. All gains on unit trusts can be offset against such losses. The gains can also be offset against pension contributions paid by the company.

You do need to keep an eye on the level of the investments. as a rule of thumb, if the value of the investments exceeds 20% of the value of the company, then your trading status may be jeopardised. Your accountant should keep an eye on this.

Finally, don't just focus on the tax. You need to pay particular attention to the asset allocation and diversification of your investments if you wish to manage the investment risk. Please feel free to contact me if you wish for guidance on this.

Bob Fraser
Chartered Financial Planner