If you have a significant amount of retained earnings in your business, you may be able to get a better rate of return on these funds.
Your trading company
Our clients all operate trading companies. Usually, trading involves the provision of goods or services to customers on a commercial basis.
However, for tax purposes, a trading company may be deemed to be an investment company if its investing activities start to become significant. There are no hard and fast rules with this, but the HMRC often refer to the 20% rule of thumb.
- Are 20% or more of the company assets held in investments?
- Is 20% or more of company income derived from investments?
- Does management spend 20% or more of their time in managing these investments?
For our clients most of the company assets are in the form of cash in bank, simply because the business of providing services does not require significant amounts capital expenditure. While clients looking to invest funds may fail the first test, this can be overlooked in view of the business structure. But tests (b) and (c) are important, and must be met to ensure the trading company is not deemed to be an investment company.
Why avoiding Investment company status is important
Investment companies cannot use the capital gains treatment for disbursement of final funds – a very tax effective way to make a final distribution to shareholders when the company is wound up;
Investing
Whether your business invests in shares, bonds, funds, or property please ensure the transactions are carried out in the business name, and funded directly from the business bank account. And most importantly, please get in touch to discuss your investment plans with your account manager BEFORE you complete any transactions. Sales pitches are very convincing, but there may be important information that is not given to you that affects your tax planning.
Also, remember, when your company ceases to trade, and you wish to close it down, all investments need to be liquidated with any gains or losses recorded in your closing company accounts.