Are you comfortable with your business’s current cash deposits? Did you know that a company or LLP has a number of options to choose from? A top priority has to be tax-efficiency, ideally combined with the additional benefits of security, easy access and flexibility. Selecting one that offers everything can be difficult.
The instant access and relatively safe (but modest) returns offered by deposit accounts may be a reasonable default position, but has it become less attractive with falling interest rates and inflation? If you are a business owner you could:
- Do nothing
- Use high-interest accounts/bonds
- Take a loan from the company
- Distribute the funds as dividends
- Make company pension contributions
But have you considered looking at other investment solutions for your liquid assets?
Many companies simply hold cash on bank or building society deposits if they have no immediate plans for it and substantial sums could build up over a number of years. Is this dead money? Note: A small limited company would receive compensation for deposits held up to a limit of £85,000, providing their bank or building society is covered by the FSCS (if they hold a UK banking licence they will be!).
When considering a suitable investment it is important to consider the company’s investment objectives and the attitude to risk of the individual’s running the company. Selecting a suitable investment might not just be about tax; different investment vehicles can introduce differing levels of administration and its important that this isn’t overlooked.
It is important to involve your accountant in any discussion. Things can get complicated.
There are two principal practices used by UK companies:
Fair Value Accounting: Under this method, any increase in the investment over the accounting period will be taxed as a non-trading credit. Corporation tax will be due if there is a gain over the period, regardless of whether the policy was surrendered in part of full during the tax period.
Historic Accounting: For the historic cost basis to apply, the company must satisfy certain criteria. Under this accounting method corporation tax is only levied on a company when part or all of the policy is realised, such as when a full or part surrender is made. They should be declared in the accounting period they are made. If the resulting surrender has resulted in a loss, this can be offset against any other non-trading credits.
Further, the accounting method used by a company depends on the regime that applies to the Company or LLP.
The Micro entities regime applies if the entity doesn’t exceed two or more of the following criteria: Turnover of £ 632,000, Balance Sheet of £ 316,000 and 10 employees or less.
The Small Entities Regime apples for Turnover of £ 10.2m, Balance Sheet of £5.1m and 50 employees or less.
To help manage the two accounting methods, either regime can be managed using different investment structures. Those available are no different to the ones used by individual investors: Collectives Investments (known as a GIA) and Onshore/Offshore Bonds.
It is important to consider the tax and cashflow impact of both the accounting method, company/LLP regime and Investment Structure. At Lavender Financial Planners Limited we will work closely with your Accountant to ensure that you keep on top of these considerations. For more information please leave your contact details with a brief summary and we will be in touch soon.