Trading company investing in Stocks and Shares

Trading company investing in Stocks and Shares

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A client of mine who is a IT consultancy business has excess fund and wants to invest in bonds and shares.  He is also contemplating buy to let property

Would it be best to set up a new company and distribute the excess funds as dividends to avoid his main company being classed as an investment company.  The company will still continue to trade

Is there any other tax implications  ?

 

Replies (18)

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By awoodj
14th Nov 2014 14:31

Possible option

It sounds likely he should setup another company as otherwise his trading status probably goes out the window along with his chance of Entrepreneurs relief. Is another option not to lend the money from existing company to new one so that it does not attract the likely tax liabilities due on taking the dividends? Hard to say for sure without all the info though so just a suggestion of what to look at.

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paddle steamer
By DJKL
14th Nov 2014 15:20

Dividends will not have a tax charge

 

The company receiving the dividends will not have a tax charge, they would be FII. They could have an impact on marginal small company calculation, but given the shrinking differential between small company rate and main rate not really much of an issue these days. Small company band with two companies will be split but again not much of an issue these days.#

Income from bonds would likely be taxable in hands receiving company.

A loan from company A to company B might negate Entrepreneurs relief anyway, it would certainly possibly impact BPR relief re the shares in company A. 

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Replying to lionofludesch:
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By awoodj
14th Nov 2014 15:36

Cash in trading company and BPR?

DJKL wrote:

 

The company receiving the dividends will not have a tax charge, they would be FII. They could have an impact on marginal small company calculation, but given the shrinking differential between small company rate and main rate not really much of an issue these days. Small company band with two companies will be split but again not much of an issue these days.#

Income from bonds would likely be taxable in hands receiving company.

A loan from company A to company B might negate Entrepreneurs relief anyway, it would certainly possibly impact BPR relief re the shares in company A. 

Would a large cash balance inside a trading company but not being used for trading attract BPR anyway though?

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Replying to Tax Dragon:
paddle steamer
By DJKL
14th Nov 2014 15:50

Possibly not

awoodj wrote:

DJKL wrote:

 

The company receiving the dividends will not have a tax charge, they would be FII. They could have an impact on marginal small company calculation, but given the shrinking differential between small company rate and main rate not really much of an issue these days. Small company band with two companies will be split but again not much of an issue these days.#

Income from bonds would likely be taxable in hands receiving company.

A loan from company A to company B might negate Entrepreneurs relief anyway, it would certainly possibly impact BPR relief re the shares in company A. 

Would a large cash balance inside a trading company but not being used for trading attract BPR anyway though?

Possibly/probably not.? The argument would require to be made that it was needed for the business. Not impossible, eg. saving to purchase say an office for the business to use, but not the easiest argument and given the argument is being made after the shareholder is dead a trail of written evidence  re intent would be useful to win the argument.

The firm I once worked for once had various clients whose religion did not permit them to insure their properties, they could only insure as required by law (cars, employees liability etc) They accordingly carried very large cash balances £500,000 upwards. I recall one of the partners arguing with HMRC that the large cash sums were a form of self insurance and therefore were business assets. Cannot for the life of me remember how it resolved, or even what tax was being argued about, but cash itself is not the issue it is cash where no trade purpose for its use can be demonstrated that causes the problems.

 

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By taxwizard
14th Nov 2014 15:32

thanks

Yes you are correct I forgot any dividends paid from the investment company to the trading company will not be exempt from Corporation tax.  A loan would indeed be the better option

The new company will still earn around 80K per year which will be the same amount that he will invest.  Perhaps a grey area when the company has trading and investment activities.  I do not know if there is any legislation that in this instance would say this is a primarily an investment company than trading and vice versa

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Replying to John R:
paddle steamer
By DJKL
14th Nov 2014 15:52

A Not too many

taxwizard wrote:

Yes you are correct I forgot any dividends paid from the investment company to the trading company will not be exempt from Corporation tax.  A loan would indeed be the better option

The new company will still earn around 80K per year which will be the same amount that he will invest.  Perhaps a grey area when the company has trading and investment activities.  I do not know if there is any legislation that in this instance would say this is a primarily an investment company than trading and vice versa

I think you have a not in your post that is not needed.

The dividends will not be chargeable to Corporation Tax in the hands of the receiving company.

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By awoodj
14th Nov 2014 15:57

Agreed

That's where I was going with the comment above, at least in the case described, if taken at face value the cash currently does not have a trade purpose or they would not be considering their proposed "investments" So either lending or just leaving it there probably has a neutral effect as far as BPR goes. I would be interested in the Entrepreneurs relief side though as my understanding was that lending from one company carrying out one business to another company carrying out another separate business (even with same shareholders and directors) does not impact the trading status of the first but be good to know if that's not the case.

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Replying to unearned luck:
paddle steamer
By DJKL
14th Nov 2014 16:24

Someone else needs to answer or I need to do some reading

awoodj wrote:

That's where I was going with the comment above, at least in the case described, if taken at face value the cash currently does not have a trade purpose or they would not be considering their proposed "investments" So either lending or just leaving it there probably has a neutral effect as far as BPR goes. I would be interested in the Entrepreneurs relief side though as my understanding was that lending from one company carrying out one business to another company carrying out another separate business (even with same shareholders and directors) does not impact the trading status of the first but be good to know if that's not the case.

I assumed that the 80/20 rule would be on point re loans from a company to another (loans in a group situation to other trading entities excepted as ER allows for Trading Groups) , to tell you the truth I always took the view that whilst a loan might be to another trading company (even owned by the same shareholders) in the eyes of the party making the loan, whose shares were in question for ER relief,  the loan was not made for its trade purpose and was therefore not a trading asset.

To be absolute re this interpretation I think I would need to do some reading or  would want a comment from one of the posters here who can whizz off section references without thinking.

Edit,Ii know it is TCGA92 s 165, it is more interpretation of that section that needs clarity.

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By pwrights
17th Nov 2014 13:17

Registered pension contributions for director in SSIP gives investments and CT relief?

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Replying to GR:
Red Leader
By Red Leader
17th Nov 2014 14:38

a slip?

pwrights wrote:
Registered pension contributions for director in SSIP gives investments and CT relief?

SIPP?

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By pauljohnston
18th Nov 2014 11:20

@pwrights

A good option, although cant invest in private property (Gordon Brown's doing).

Growth would be tax free and 25% tax free on exit with remainder at marginal rate.  Further more death would mean that the fund could move on with a low tax charge.  (Mr Osbourne is suggesting this could be nil)

There could also be tax relief on Contributions

 

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By awoodj
18th Nov 2014 13:36

As above

Might be an option but not based on requirements stated by OP as there are limitations on contributions that can be made at one time and a SIPP can only hold commercial property.

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By Alex999
18th Nov 2014 14:20

I am a trainee, currently doing my ACCA F7 paper.

I thought as long as the investment did not look like it was a change in trade ie a construction company has a t/o off say £100m but has investments in shares of say £2m (non of which are enough to make the holding an associate), the investment would go on the balance sheet as an Investment in Equity and any changes in its annual amount would go to profit and loss as a +/-.

So as long as the investment was not enough to look like a change in trade ie into an investment company, why bother going to the hassle offsetting up a new company to make the investment?

Please let me know if I am missing something.

 

 

 

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Replying to ABC123Accountant:
paddle steamer
By DJKL
18th Nov 2014 14:36

Apples and pears

Alex999 wrote:

I am a trainee, currently doing my ACCA F7 paper.

I thought as long as the investment did not look like it was a change in trade ie a construction company has a t/o off say £100m but has investments in shares of say £2m (non of which are enough to make the holding an associate), the investment would go on the balance sheet as an Investment in Equity and any changes in its annual amount would go to profit and loss as a +/-.

So as long as the investment was not enough to look like a change in trade ie into an investment company, why bother going to the hassle offsetting up a new company to make the investment?

Please let me know if I am missing something.

 

 

 

HMRC guidance on 80/20 split re say ER. Re your example you would need to compare the investment in shares of £2 million with its other assets, not its turnover, and you would need to compare the income from the £2 million with its trading profits, you cannot really compare its turnover with the asset, it would be a bit apples and pears.

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Replying to NH:
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By Alex999
18th Nov 2014 14:39

OK, so lets say the comparison was made and it turned out that the investment was a minor one compared to its other assets and trading profits. I presume it would get recorded as an investment on the balance sheet and annual increases and decrease go to the P+L.

I am just questioning the above advice not to sound like a know it all, but because many (most) of you have far more experience then me advising clients, but my advice would differ considerably from the advice above. Why set up a new investment company? As long as it was a minor investment compared to the businesses other assets/profits it is just an investment the company is making. Please let me know if I am right or wrong?

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Replying to brumsub:
paddle steamer
By DJKL
18th Nov 2014 16:25

Some thoughts

Alex999 wrote:

OK, so lets say the comparison was made and it turned out that the investment was a minor one compared to its other assets and trading profits. I presume it would get recorded as an investment on the balance sheet and annual increases and decrease go to the P+L.

I am just questioning the above advice not to sound like a know it all, but because many (most) of you have far more experience then me advising clients, but my advice would differ considerably from the advice above. Why set up a new investment company? As long as it was a minor investment compared to the businesses other assets/profits it is just an investment the company is making. Please let me know if I am right or wrong?

There is no real problem holding say listed investments on the balance sheet if insignificant, but there possibly is an issue if  it is excessive re the disposal shares in the company holding the investment. 

If a company were to plough its profits into such investments then on a later wind up ER for capital gains could well be in doubt. The 80/20 rule is HMRC guidance as to where they believe there may be an issue. The same issue can arise with excess cash, although there is some indication HMRC may be less willing to push the argument in such a scenario.

The treatment on valuation movements I think, from a poor memory, turns on whether carried as current asset investment or fixed asset investment. I think, if current asset investment it would carry at lower of cost and NRV, possibly with a valuation given in the notes to the accounts and only reductions in value below cost recognised via the P & L, if a fixed asset investment would it not adjust through the Total  Recognised Gains and Losses statement.

Do not quote me on this as frankly the niceties of accounts disclosure rules for smaller companies has never interested me (heresy, I know) so I tend to let the software guide me rather than reading all 200 odd pages of the FRSSE.

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By pauljohnston
18th Nov 2014 15:34

@Pension Contributions & ajwood

SSASs may invest in commercial and industrial property whether situated in the UK or abroad.   Commercial property of any kind can be a useful planning tool when leased to the family company. 

Contributions by the Company I believe are limited to £40k per annum

 

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By tonyaustin
18th Nov 2014 19:12

Only shareholders receive dividends

therefore the new company would have to be a shareholder in the old company if you want to transfer funds from old to new by dividend.

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