Making company cash work harder
For adviser use only
Limited companies often hold significant cash balances for a variety of different reasons. They might need the cash to provide working capital; to help the company grow its trade in the future; to provide a buffer for leaner times; or, to take advantage of speculative opportunities. Given that we are currently in an era of low interest rates, company directors might want to look at alternative ways to make the company’s spare cash work harder to generate more income and/or capital growth. Let’s look at some of the investment options open to the directors of a limited company.
How are investment bonds taxed?
Where a limited company owns an investment bond, the bond is subject to the loan relationship rules rather than the chargeable event regime. Unlike individuals, companies don’t qualify for the 5% tax deferred withdrawal allowance.
The tax treatment follows the accounting treatment of the investment bond in the company’s financial statements and is determined by the size of the company.
Businesses defined as ‘Micro-entities’
The Small Companies Micro-Entities Accounts Regulations 2013 introduced a new category of small company, namely the micro-entity and Financial Reporting Standard (FRS) 105 sets out the accounting treatment for micro-entities. Financial reporting standard (FRS) 105 has replaced the Financial Reporting Standard for Smaller Entities (FRSSE). . A micro-entity is a company which meets at least two of the following three conditions in the financial year:
- Its turnover doesn’t exceed £632,000,
- The balance sheet total isn’t higher than £316,000, and
- The average number of employees isn’t greater than 10.
These conditions have to be met in at least two consecutive years for a company to be classified as a micro-entity and have to be exceeded in at least two consecutive years for a company to no longer meet the qualifying conditions.
Under FRS 105 micro-entities aren’t allowed to revalue their investments year on year and instead they account for their fixed assets under the historic cost regime.
If a micro-entity prepares its financial statements under the historic cost regime, then an investment bond won’t be revalued every year, so any tax liability in relation to the unrealised gain will be deferred. There will only be a gain or loss for tax purposes when there are part surrenders, a full surrender of a bond, the last life assured dies or if there is an assignment for money or money’s worth.
However, if the micro-entity feels that FRS 105 doesn’t meet its needs, then it can still choose to prepare its financial statements in a similar fashion to larger companies.
Larger companies prepare their accounts in accordance with FRS 102, which would generally see an investment bond reflected at its fair value in the company’s financial statements.
Where the company accounts for a bond under the fair value method of accounting, the increase in the policy value which arises over an accounting period will be taxed as a non-trading credit under the loan relationship rules. This non-trading credit will generally be the difference between the surrender value of the policy at the start of the accounting year and the end of the accounting year. Where the value of a policy falls in a particular accounting period, then under the loan relationship rules the company might be able to claim tax relief for the loss in value on the policy as a non-trading debit.
What about collectives in a General Investment Account?
UK dividends aren’t taxed when they’re received by a limited company. Interest distributions will generally be paid gross and the company will be subject to corporation tax on the interest it receives in the financial year.
Where a company owns equity based collective investments, these don’t come under the loan relationship rules. Whether the company is a micro-entity or a larger company, the fund isn’t revalued every year for tax purposes and the company benefits from tax deferral, as any gain simply rolls up until it is realised. When a fund is sold, the company will be subject to corporation tax on any gain realised after deduction of indexation allowance (which is an allowance for inflation for the period the investment has been owned). However, indexation allowance can’t be used to increase a loss that arises in the year.
Collectives which comprise more than 60% interest bearing stocks come under the loan relationship rules. In the case of a micro-entity, any gain will be taxed when it’s realised. With a larger company, the fund will be revalued each year and any non-trading credit will subject to corporation tax.
What else should a company consider?
If a company is holding large cash balances or investments for a non-trade purpose, then this could lead to the loss of business property relief that the shares attract for Inheritance Tax purposes and could impact on the availability of entrepreneur’s relief if the shares are sold.
The tax treatment of corporate investments is complex and the company directors will need to take advice. Tax is not the only driver in relation to recommending an investment for a company, as other factors such as the company’s risk appetite, level of access required and the timeframe for any investment will also have to be taken into consideration.
The value of any tax relief depends on your individual circumstances / the individual circumstances of the investor. This information is based on our understanding of current, taxation law and HMRC practice, which may change.