This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
As a business owner or director, a big question you face is how to invest your profits. What are ideal corporate (or sole trader) investments, and how can you invest in the most tax-efficient manner? In this guide, our financial planning team at Elmfield here in Padiham, Burnley offers ideas for how to approach corporate investing – both for larger firms, and for SMEs.
Corporate investing, defined
Quite simply, corporate investing refers to how a business owner/director invests profits (or surplus cash) from their business – e.g. rather than simply taking it as an income, distributing to shareholders (as dividends) or holding it as cash. Careful planning is needed to get the most out of your profits. After all, withdrawing too much risks a hefty tax bill. On the other hand, letting cash build up in your business account represents a huge opportunity cost.
The attractiveness of corporate investing depends heavily on the UK corporation tax rate. The lower it is, the more it tends to appeal to owners and directors. In 2010-11 it stood at 28%, and had fallen to 19% in 2020/21. However, last year the Chancellor announced that it would rise back up again – to 25% – in 2023 for companies with profits over £50,000.
In light of this, 2022 may be an ideal time for you to consider corporate investments before the tax rise comes into force.
Investment vehicles for business owners
There are a range of options when it comes to tax-efficient investment vehicles for UK business owners. The right ones for you will depend on a range of factors, including:
- Your investment horizon (how long you want to invest for).
- Whether you are a company director or a sole trader.
- The risk appetite of you and other key decision-makers.
- How involved you want to be with managing your investment(s).
- Your desired level of return.
- Which sectors most appeal to you and help diversify your business portfolio.
- Your willingness to consider alternative investments, not just “mainstream” assets.
With some of these parameters defined with your financial adviser, you can start to narrow down on tax-efficient options. For instance, in the UK, capital gains tax (CGT) is paid by self-employed sole traders or those in a business partnership, when an individual disposes of an asset (e.g. a set of shares) for a profit. Limited companies pay corporation tax instead. However, the former could use their CGT-free allowance (£12,300 per year) to dispose of assets tax-efficiently, and put up to £20,000 into investments in an ISA each year to also generate CGT-free growth. This can make “mainstream” assets such as equity/bond funds more attractive to sole traders and individuals in a business partnership.
Directors of limited companies, however, may find it more tax-efficient to consider other options. For instance, employer pension contributions can be treated as a business expense (reducing corporation tax) and do not pay National Insurance contributions like employee contributions do when putting into their pension. Raising your company pension contributions, therefore, could be a good way to invest in your retirement whilst reducing unnecessary tax liability.
Another important consideration with corporate investments in liquidity. COVID-19 has been a strong reminder that revenues and profits are not always stable, and investments may need to be sold quickly to access much-needed capital to keep the business afloat. This is where the likes of stocks and bonds can have an advantage over, say, direct property investments held by a business (which take longer to sell). A financial adviser can help guide you to ensure enough liquidity in your corporate investment portfolio.
The long-term view
Of course, it would be a shame to make a range of corporate investments which later become excessively eroded by inheritance tax (IHT) when you – or another business owner/director – dies. Here, careful estate planning is required.
Fortunately, most business owners will have a business which qualifies for Business Relief. It offers 50% or 100% IHT relief on some of an estate’s business assets, which can be claimed by the will executor or estate administrator. The purpose of BPR is to help a family-owned business pass down to others in the family without needing to sell it (to cover an IHT liability).
For those looking to eventually pass their business down as a legacy, therefore, it can be highly tax-efficient to invest in the business’s assets (not just directors’ pensions) – especially if these qualify for BPR. Relief can be claimed, for instance, on property and buildings, unlisted shares, land and machinery. However, BPR will likely not be available if your business mainly deals with securities (e.g. stocks/shares), is a not-for-profit or is being sold.
Invitation
You may have gathered by now that corporate investing is multi-faceted and involves a lot of careful planning to ensure tax efficiency. It can be difficult to discern this landscape yourself, so an accountant (at the very least) will be helpful. A financial adviser/planner who specialises in business owners can help you with the factors mentioned in the bullet points above.
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
