Making Tax-Efficient Investments
If you have been trading through a limited company and currently have a 'fighting fund' of spare money that you have built up over the last few months or years and now wish to use for investment purposes, you have a few options open to you.
Firstly, you could decide to invest some or all of this money into a pension (further details can be found in our other article "A Clearer Future Pension Regime") but this would inevitably mean that this money would be locked away until you are at least 55 years of age.
Secondly, you could simply purchase your choice of investment through your limited company, but remember with most investments, any profits made upon sale will be immediately assessable to Corporation Tax, which is not as efficient as holding the investments privately where you would at least be able to make gains of up to your annual exemption of £10,100 before any tax is payable.
Does this therefore mean that if you do not wish to invest in a pension, you should withdraw the excess cash and invest it yourself then?
We would suggest not, unless you would like to potentially pay a further 25-36% tax on the withdrawal of the cash from the limited company (usually best taken as a dividend) and therefore have less to invest in the first place!
Instead, you could consider using what we call an Investment LLP, whereby the limited company invests the spare money into a separate legal entity (a Limited Liability Partnership) which can then purchase the investment asset itself. As an LLP is a partnership, which is very flexible by its nature, it is therefore possible to apportion any income or gains as agreed between the members. If at least one of the members happens to be an individual, then this can allow gains of up to £10,100 to be made without tax charge, and more substantial gains to be taxed at rates between 18-28% rather than up to almost 60%!
If you are in this position, or would otherwise like to find out more about how running your trading activities through a Limited Liability Partnership structure can help, please contact one of our advisors on 0203 651 6700
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