Synopsis: A reminder of the fundamentals pre corporate investment

Date posted: Tuesday, November 12, 2013

The press has been carrying consistent reports of strong cash balances in public companies, where this is also true for private companies, continuing low interest rates may lead to requests for advice on investing corporate money.

For detail on the taxation aspects of corporate investment, including the loan relationship rules see the Opus Gold heading Corporate Investment. The following represents a summary of the key points to consider when advising on corporate investment:

ensure that there is no known/ foreseeable need for the cash to be invested

consider paying down any debt

consider the potential for deductible contribution to registered pensions (perhaps using the carry forward provisions to maximise relief)

consider, in association with the company’s accountant, the potential detrimental impact that investment could have on the shareholders’ potential to access entrepreneurs’ relief on a subsequent sale of shares. Substantial (20% or more of the company’s assets) investment should be resisted if a planned or even possible future sale of the shares in the business could take place. For more detail see Corporate Investment

If, having discussed these aspects and recorded the outcomes, investment is considered appropriate, then:

Carry out an appropriate risk assessment to establish “corporate attitude to risk” and record this.

Consider whether in the light of the portfolio selected it would be appropriate to “wrap” it in a bond – UK or offshore. Having determined that the portfolio can be accessed in these wrappers and the charges are acceptable – tax will be the main determinant.

For bonds the “core provisions” in relation to the tax treatment of the company as an investor are the loan relationship rules which, broadly speaking, provide for the taxation of the increase in the balance sheet value of the investment year by year – regardless of realisation. These rules can be avoided by small companies who adopt the historic cost basis of accounting so that the normal tax deferment qualities of a bond can be enjoyed. The company’s accountants should be engaged to establish which basis of accounting has been adopted.

If investment though collectives is made then any interest distributions will be assessed as they are declared (regardless of whether they are received or automatically reinvested).

Dividends received from UK collectives and most offshore collectives will not give rise to any tax liability for the investing company.

Only capital gains in excess of inflation (measured by reference to the RPI) realised by the investing company will be assessed to corporation tax.

Especially given the detail that needs to be considered, corporate investment is a topic on which experienced financial advice is absolutely crucial. It also offers scope for client focused collaboration between financial advisers/planners and accountants.

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