Hi All - found a few threads on this, but years old - with advice based on outdated rules/tax laws.
1) I have reserves in my company account that I am not thinking about investing through the company.
2) I am 32, have a chunk of personal funds invested in ISA, funds and SIPP. I know SIPP is the most tax effective way to go, but I don't want to put any more into it due to age of access.
3) I've come across the below illustration from an accountant - but I disagree based on i) I would not withdraw any excess that would incur 32.5% dividend tax (unless needed) - so my view is invest the chunk doing nothing, to grow the capital. You could say you are deferring tax (i.e. you will incur 20% tax (either Corp tax or CG I'm not clear but doesn't matter as both 20%) - but the point is that you are investing and hope to grow the sum.
I've read bits on how this may affect relief on winding up the company - which I've not au fait on, does it depend on the ratio of investment vs annual sales?
If the company invests £10k, there’s no tax relief on the initial investment and so the amount invested is £10k. You hold onto this for 10 years, achieving compound growth of 8%, as planned, and sell the shares for £21,589 (10,000 x 1.08^10). Now the company has a chargeable gain of £11,589 (£21,589 proceeds less £10,000 cost) which will be taxed at 19%, increasing your corporation tax liability in that year by £2,201 and leaving the company with £19,388 from the investment proceeds. Next, you need to get these profits out of the limited company, so pay a dividend for the full amount after having paid corporation tax (£19,388) and are taxed at 32.5% on it (£6,301). This leaves you with just £13,087 in your pocket.
On the other hand, if your limited company paid a dividend of £10k now, and you invested the post-tax distribution – you would have £6,750 to invest after 32.5% dividend tax (sounds bad but keep reading!). You invest the £6,750 in the same stock as you would have done from the company, apply the same growth in the same way (6750 x 1.08^10) and you sell it in 10 years’ time for £14,572. Gains on personally held investments are subject to capital gains tax on any profits (proceeds less cost) in excess of the annual exemption (£12,000) at 10% for basic rate taxpayers or 20% for higher rate taxpayers (with an 8% premium if the asset is residential property). The gain in this case is £7,822, and therefore below the annual exemption and so no additional tax would be due, meaning that the taxpayer is better off by £1,485 by investing the money personally vs through the limited company.
Many thanks
1) I have reserves in my company account that I am not thinking about investing through the company.
2) I am 32, have a chunk of personal funds invested in ISA, funds and SIPP. I know SIPP is the most tax effective way to go, but I don't want to put any more into it due to age of access.
3) I've come across the below illustration from an accountant - but I disagree based on i) I would not withdraw any excess that would incur 32.5% dividend tax (unless needed) - so my view is invest the chunk doing nothing, to grow the capital. You could say you are deferring tax (i.e. you will incur 20% tax (either Corp tax or CG I'm not clear but doesn't matter as both 20%) - but the point is that you are investing and hope to grow the sum.
I've read bits on how this may affect relief on winding up the company - which I've not au fait on, does it depend on the ratio of investment vs annual sales?
If the company invests £10k, there’s no tax relief on the initial investment and so the amount invested is £10k. You hold onto this for 10 years, achieving compound growth of 8%, as planned, and sell the shares for £21,589 (10,000 x 1.08^10). Now the company has a chargeable gain of £11,589 (£21,589 proceeds less £10,000 cost) which will be taxed at 19%, increasing your corporation tax liability in that year by £2,201 and leaving the company with £19,388 from the investment proceeds. Next, you need to get these profits out of the limited company, so pay a dividend for the full amount after having paid corporation tax (£19,388) and are taxed at 32.5% on it (£6,301). This leaves you with just £13,087 in your pocket.
On the other hand, if your limited company paid a dividend of £10k now, and you invested the post-tax distribution – you would have £6,750 to invest after 32.5% dividend tax (sounds bad but keep reading!). You invest the £6,750 in the same stock as you would have done from the company, apply the same growth in the same way (6750 x 1.08^10) and you sell it in 10 years’ time for £14,572. Gains on personally held investments are subject to capital gains tax on any profits (proceeds less cost) in excess of the annual exemption (£12,000) at 10% for basic rate taxpayers or 20% for higher rate taxpayers (with an 8% premium if the asset is residential property). The gain in this case is £7,822, and therefore below the annual exemption and so no additional tax would be due, meaning that the taxpayer is better off by £1,485 by investing the money personally vs through the limited company.
Many thanks
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