You may have noticed on our social feeds over the past few weeks that we’ve been posting various methods to help business owners manage surplus cash in their companies.

So far, these tips have included:

– Doing nothing and just holding onto it

– Saving it in high-interest accounts to safely generate a return

– Withdrawing it from the business, paying the tax, and spending it on whatever you’d like.

The most recent of these blogs focused on how you could go about investing your surplus cash to potentially give it a boost.

However, one additional consideration to investing surplus cash is the tax treatment of your investments.

Your business investments are treated very differently in terms of tax than if you hold them personally. And naturally, it’s important to invest your money as tax-efficiently as possible, so that you can make the most of any generated returns in running and growing your company.

So, here are a few avenues you can explore to make sure you invest surplus cash as tax-efficiently as possible.

Your tax bill can depend on your accounting status and period

As you may already have read in our blog, income or gains from business investments are subject to Corporation Tax rather than Capital Gains Tax (CGT).

If you’re a higher- or additional-rate taxpayer, this may already present a better option than holding investments individually; the Corporation Tax rate in the 2022/23 tax year is 19%, whereas the CGT rate for higher- or additional-rate taxpayers is 20% (28% on property that isn’t your main residence).

Even so, it’s worth noting that you can use your accounting status to your advantage to take control over the tax you’ll owe.

For example, if your business is considered to be a micro-entity, there are a couple of effective ways you can better manage tax on your investments.

To be a micro-entity, your business must meet two of following three criteria:

– Turnover of £632,000 or less

– £316,000 or less on its balance sheet

– 10 employees or less.

If this describes your business, you may be able to:

1. Pay tax on a historic cost basis. In essence, this means that you’ll only owe tax where a withdrawal is taken in the accounting period.

2. Defer your tax bill. Even more powerfully, you could even defer the tax bill directly to a different accounting period. This would give you more flexibility in deciding where to place your bill, perhaps withdrawing the gains to offset losses in a particular year.

Tax is infamously convoluted at the best of times and there are lots of moving parts in these particular strategies. Make sure you speak to us first if you think these may be appropriate for you.

Carefully choosing investments for maximum tax-efficiency

Aside from carefully managing your accounting status to your advantage, it may also be worth considering whether there are specific investments that come with more favourable tax treatment for businesses.

For example, corporate investments in unit trusts and open-ended investment companies (OEICs) will typically be taxed according to the assets contained within them.

So, you could carefully review the underlying investments in trusts and OEICs to reduce your tax bill.

Generally, your gains will be treated as:

– An income distribution from a non-equity fund if 60% or more of the fund is invested in cash and fixed-income investments, such as gilts or bonds

– A dividend distribution from an equity fund if less than 60% is invested in cash and fixed-income investments.

Similarly, investment bonds tend to be subject to what are called the “loan relationship” rules, rather than the “chargeable event” rules.

This means that the bonds are taxed based on their value at the end of each accounting period, rather than on withdrawals you make.

Other investments, including gilts, corporate bonds, and some certain life assurance policies, are also subject to these loan relationship rules.

So, depending on how you structure your portfolio, you may be able to lower your tax bill.

Speak to an expert

As you can see, there are plenty of considerations over tax treatment of your company investments that can change how much you might owe.

No matter how you decide to make use of these various advantages, the investments need to suit your attitude to risk, your goals for the company and, more importantly, the business’s current financial situation.

That’s why it can be sensible to speak to a financial expert.

Want to find out how you can make your business investments as tax-efficient as possible? Get in touch with us at Cordiner Wealth.

Email hello@cordinerwealth.co.uk or call 0113 262 1242 to find out how we could help you.

You can also download your free guide here to find out even more strategies for managing surplus cash.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.