Successful established businesses build up cash reserves.
Cash is king, and, as the saying goes:
“Companies don’t go bust, they run out of cash”.
However, there comes a point where companies accumulate too much cash. It’s a nice problem to have, but still a problem.
What is corporate investing?
Corporate investing is simply investing the profits / surplus cash of your business, instead of drawing it as income or holding it in cash bank accounts. It’s also a way to withdraw additional money from a company in a tax-efficient way, when it is not intended to be used as income.
Although a business owner can choose to pay themselves in dividends or through a salary, taking too much out of the business to simply sit in your bank account can result in a hefty tax bill. Conversely, allowing profits to mount up in your business account means this money isn’t actively working for you or the company.
Withdrawing money to place into carefully considered investments can be a savvy decision. Sometimes, re-investing cash into your business or distributing it among shareholders won’t be appropriate, making corporate investments an attractive option.
Why should I bother?
As we have witnessed over the past year cash returns have been dismal and have failed to keep up with inflation.
So, how do you make your money work harder?
While investing in the business and assets such as property, machinery and acquisitions is probably the most profitable way to grow revenue streams and achieve business growth, cash stagnating in deposit accounts is not working hard enough for you.
So, instead, you could consider investing some of this company cash into a portfolio like you may personally hold within your pensions or investments, owned and held by the company.
Benefits include:
- Diversifying into other securities and assets to give your business multiple revenue streams
- Potentially generating more money that can be reinvested into your business
- Giving your surplus cash a chance to grow rather than leaving it in a savings account with an incredibly low interest rate
- Reduces the default risk of holding too much in one bank account
The table below shows a comparison of cash returns verses a common portfolio we use for corporate investments. This assumes an investment of £100,000 in 2010 into our Portfoliosense® 60 Strategy and either the Bank of England Base Rate is achieved or 1% in excess of this until the end of 2021.
| Holding | Starting Value | End Value | Change £ |
| Bank of England Base Rate | £100,000 | £105,508 | £5,508 |
| Bank of England Base Rate + 1% | £100,000 | £118,889 | £18,889 |
| Portfoliosense Global Portfolio 60* | £100,000 | £240,481 | £140,481 |
*This does not account for any platform or ongoing adviser charge
We typically prefer to use our strategy known as Portfoliosense®. This is a proven, smarter, evidence-based approach to investing capital, designed to deliver proactive investment management and long-term outperformance all at a low cost.
This includes behavioural finance support (trying to stop you making poor choices or expensive mistakes), quarterly commentaries and online and /or app valuations and reporting.
Things you should know:
While you may access monies without financial penalty, you should have a time horizon of at least five years, ideally longer. If access to cash is an issue for you, ensure that you retain sufficient funds in easy access accounts before investing any surplus that remains. It may also be wise not to lock away investments for too long, if you’re worried about cash flow.
Your capital is at risk. Your investments could fall in value. Any losses may be used to offset any profits and reduce the company’s liability to Corporation Tax.
The taxation of a company investment can vary depending on a number of different factors which includes the accounting basis adopted by the company and the type of investments.
Where a company qualifies as a micro-entity*, they can use the historic cost basis of accounting for all their investments. This effectively means that tax is only payable where a withdrawal is taken in the accounting period, therefore allowing, where possible, the company to plan the timing of withdrawals to its advantage.
For all other companies, the type of investment wrapper and underlying investments will determine how they are accounted for and subsequently how they are taxed. For example, should an investment bond be used, the tax liability is based on any increase in value from year to year and paid annually. Due to this, investment bonds rarely make sense from a tax perspective where a company invests in growth assets (equities).
Another common investment wrapper for companies is a General Investment Account (GIA), unlike a personally held GIA, a company is subject to corporation tax on income and gains from these investments. However, the underlying investments used in a GIA determine how and when tax is due.
If defensive funds (non-equity assets like bonds and gilts) are held, any income received and any capital gains, realised or unrealised, are subject to corporation tax on an annual basis. Although, micro-entities would be able to benefit from tax deferment until disposals as they will be able to use the historic cost basis of accounting.
Where growth assets are held, the dividend allowance and tax rates applicable to personal investments are irrelevant, as the dividend will effectively be “franked” and will not be subject to any corporation tax when received by the company. For capital gains, these are only taxed when there is a disposal (effectively a sale of any growth asset for any reason). Unlike a personal investor, a company does not have an annual exemption, although any losses which arise can be offset against the company’s corporation tax liability.
Aside from the taxation of the actual investments, careful consideration needs to be given to any impact that investment may have on the availability of other reliefs available to business owners, which includes business asset disposal relief (formerly known as entrepreneurs’ relief) on a subsequent sale of the business.
Broadly speaking, serious consideration will need to be given if the amount to be invested exceeds 20% of the capital assets of the company. There are other (potentially ameliorating) aspects to take into account, but the stated 20% test is definitely a starting point.
Finally, investments held within a company could be regarded as an “excepted asset”, which may not qualify for Business Relief, but the same goes for cash held within a company. Where this is the case, the value of cash or investments would be excluded from the value of company for BR purposes and be liable to Inheritance Tax on death.
There is an added danger if the company has excessive levels of cash or investments, BR would be lost entirely if the primary purpose of the business is deemed to be investing rather than trading.
*To be classed as a micro-entity, the company must meet two of the following criteria:
- Turnover of £632,000 or less
- Balance sheet asset of up to £316,000
- Average of 10 employees or less
Not all tax planning is regulated by the Financial Conduct Authority.
It must be remembered that where investments are made either directly or indirectly in the stock market, then the value of such investments can fall as well as rise. All equity investments can reduce in value to zero and you must be able to accept the total loss perspective if you are going to invest in stocks and shares. You may get back less than you have invested. Past performance is not a guide to future performance. Stock market investments should be viewed as a medium to long-term commitment, and you should be able to commit your funds for at least five years.
