Investing Through a Company

What are the tax implications of investing through a company?

If your company has built up profits that you don’t need to withdraw, you may want to invest the money instead. This can be attractive because the company can invest its retained profits without you first having to pay personal tax on dividends. However, the tax treatment depends on what you invest in and how the investments are held.

Property and shares can be particularly attractive investments for companies, although they are taxed differently. Rental profits and gains from selling property are generally subject to corporation tax. Dividends received from shares in other companies are often exempt from corporation tax, while gains on selling shares may also be exempt in certain circumstances, particularly where substantial shareholdings in trading companies are involved.

The taxation of corporate investments therefore needs to be considered before committing the funds. There may also be further tax to pay when you eventually take the money out of the company.

How should your company investments be structured?

The simplest option may be to make investments through your existing trading company. However, this can create problems if the investments become substantial.

For example, buying rental property or building up a large share portfolio within a trading company could affect its eligibility for Business Asset Disposal Relief when the owner eventually sells their shares. Investments that are not used for the trade may also be excluded from inheritance tax Business Relief. Holding substantial investments within the trading company can also complicate a future sale if the buyer is interested only in the trading business.

An alternative is to introduce a holding company with separate subsidiaries for trading and investment activities. This can allow profits to be invested elsewhere within the group without first distributing them to the shareholders personally. However, the activities of the wider group can still affect the availability of tax reliefs.

A separately owned investment company may be another option, although transferring profits into it can create additional tax liabilities. Some investment companies are also subject to the main rate of corporation tax regardless of their level of profits.