Should I invest company cash in stocks and bonds?
This is a question that I am often asked by clients seeking higher returns on their cash than they would otherwise achieve from a bank, where they do not want to extract the cash from the company due to the tax that would be suffered on dividends, or believe that the investment would be taxable deduction in their accounts.
We often get questions from our clients on what to do with their company’s cash reserves, especially if they are holding off from extracting the cash for personal tax reasons.
“Can I do something with my cash reserves to earn a higher return rather than it just sitting in the bank?”
For most businesses we will steer you away from share and bond trading in your limited company for various reasons, but mainly because it is more efficient to invest as an individual.
Tax risks and implications of investing company money in the stock market
The key points are:
- Your investments are not treated as a trading expense. This means you do not benefit from Corporation Tax relief. Instead, whichever securities you buy will sit on your company’s balance sheet as an asset until you sell it.
- When you sell the asset you will pay corporation tax on any gains. However, unlike individuals, companies do not have an annual exemption for capital gains. This makes it more efficient for an individual to make investments rather than a company
- There used to be a indexation allowance afforded to companies (which increased the base cost of investments based on inflation, however, this is no longer the case. In other words, it used the be debatable, but now investing is far more favourable from a tax point of view for individuals.
- If you make a loss when selling an investment, you cannot use it against your regular ecommerce revenue; it can only be set against other gains from the same investment activity.
- If you were to pursue this route you must be careful that the level of investment activity is minor relative to your main trade. It can both affect your accounting and tax treatment, as well as alter your position with respect to Entrepreneurs relief.
How to maximise the return on your company’s money
With the above implications clarified, what are your options?
Invest in the stock market in a separate Investment Company
The most common structure is to set up a separate company and provide it with an intercompany loan. This avoids some of the pitfalls highlighted above and insulates the main trading company from risks in the investment company.
We would recommend seeking professional advice on your investment decisions. Key is to minimise your trading costs, and at the time of writing, Interactive Brokers are amongst the cheapest providers.
Invest in your pension
Your company can contribute to your pension, e.g. workplace pension or SIPP, and receive Corporation Tax relief in the year that they are paid (subject to certain restrictions). They are also National Insurance free which makes them tax advantaged, at the cost of tying the money up until retirement.
Re-invest in the company
If cashflow is great, consider using it to fuel growth in your own business. Upskill yourself, hire in skilled individuals, or up your marketing! We work with a number of great companies who can help you take the next step on your ecommerce journey - just send us an email.
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