Keeping excess cash on deposit within your business would have meant the capital would most probably have been eroded by the effects of inflation over recent years. This means the real value of the capital is reducing, eroding the spending power of your money in the future. To top it off, the small amount of interest you receive is also subject to Corporation Tax!
What are your options?
A potential solution is to invest the money held on deposit over the medium to long term within a Corporate Investment Account.
However, due to changes in corporate accounting bases, your company may have to value the investment annually and so pay Corporation Tax on any increase in the value. This will affect your cash flow and increase your accountancy costs
Therefore, the investment you choose should meet two objectives. Firstly, it should have the potential of providing a better return than a deposit account, not only to keep pace with but beat inflation and aim to provide superior investment returns. Secondly, the investment should be structured so that Corporation Tax is only payable on encashment of units and not annually on any increase in value.
Equity-based Corporate Investment Accounts
More specifically, equity-based Corporate Investment Accounts can meet these objectives and therefore be considered as an appropriate investment for your company’s cash over the medium to long term.
It is possible to invest in a broad range of stocks, shares, and other assets without any Corporation Tax liability within the fund. They are ‘collective’ investment funds, pooling your money with that of other investors.
This provides an opportunity for capital growth or income over the medium to long term.
What is the Tax Position?
If an investment is made into an Equity-based Unit Trust that is not ‘debt-based’, defined by holding 60% or more of investments such as interest-bearing cash deposits, Government Gilts or corporate debt, tax liabilities on gains will only arise on full or partial encashment. Simply put, the value of the investment account remains at its original value on your company balance sheet.
Distributions from Corporate Investment Accounts are not subject to further Corporation Tax. This can provide a useful source of income for your company.
When the Investment Account is fully encashed, any gain will be subjection to Corporation Tax.
Carrying out a thorough review of your business with the help of a Chartered Wealth Manager who specialises in corporate advice, will ensure that you better understand your options and what investment may be suitable for you. This will involve reviewing your memorandum and articles of association and the accounting basis of your company.
Your adviser should work alongside your accountant to ensure the company will not lose any important benefits such as Entrepreneurs Relief or Business Relief when you make the investment.