Source
r/UKInvesting•
ByteTheBit

Investing using Limited Company

I have a limited company setup which its sole purpose is to invest. Reason for this is because I have another trading company which is profiting a fair amount. I loan these profits to the investment ltd company.

I believe dividends received by a ltd company aren’t taxable. This made me think - is the best way is to receive dividends and then re-invest the dividends back into the fund? This avoid tax when coming to sell the funds at some point.

Is anyone else investing through a ltd company and is it beneficial to invest in high dividend funds instead of growth orientated funds?

Posted Mar 16, 2021, 5:37 PM UTC

3053
LegoNinja11•

Dividends are exempt from being chargeable to Corporation Tax when recieved by a small company. Look up Dividend Exemption.

However if you've got two companies under common control and moving funds between as dividends, interest, loans etc. Then theres going to be the potential for transfer pricing issues and anti avoidance rules. Fine line between a tax efficient setup and a tax avoiding setup and this is way beyond the pay grade for reddit 'advice'

Speak to a qualified accountant, (and make sure they're a tax specialist!)

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ByteTheBitOP•

Thanks. As my investment ltd company is classified as a small company, in theory, dividends received should be exempt. I'll ping my question over to my accountant.

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krisolch•

However if you've got two companies under common control and moving funds between as dividends, interest, loans etc

This is not true at all.

You can do inter-company loans as much as you want, from 0% interest to the market rate.

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LegoNinja11•

Sorry, the Government documentation on transfer pricing between connected parties must be wrong then and you're right.

https://www.gov.uk/guidance/transfer-pricing-transactions-between-connected-companies

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ByteTheBitOP•

In my case, I'm currently charging 2.25% interest (current HMRC rate)

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LegoNinja11•

As two small companies youd be exempt from having to apply arms length pricing, but if it benefits the company then fine.

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ByteTheBitOP•

apply arms length pricing

Interesting thanks. Will look more into that.

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krisolch•

Yes that's fine.

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Azurnoob•

Interesting idea- will watch thread

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rocknstones•

Ditto

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[deleted]•

[deleted]

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ByteTheBitOP•

Ah yeah, this was one of the first articles which I read which motivated me to get a ltd company set up to invest. They mention that dividends don't need to be taxed when being received by a ltd company here: https://www.foxymonkey.com/how-to-invest-your-company-profits/#7632

​

As a reader has rightly pointed out, dividends received at the company level are exempt from corporation tax (HMRC link). That’s as long as the location of the fund/shares is in the UK or in one of this long country list. This is great and an added benefit! That’s because dividends have already been taxed at the company which distributes them, therefore avoiding double taxation.

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MaxedOutISA•

This guide was what we used when we set up our limited company to use as an investment vehicle too (using the profits from other limited companies, which we lent across - like OP plans to). Should answer most of OPs questions, can highly recommend.

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PMMEURTATTERS•

Oh man, I wish I knew this while I was still contracting. Lots of money was sat in my limited company. I asked my accountant, he suggested it'll be very difficult and has lots of implications, so I left it. Doesn't matter, next time hopefully.

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BigSARMS•

You are right the company doesn't pay taxes on dividends (nor corp tax on the profits), but ofc if you pay yourself out from this company it will be taxable in the normal way, and I don't think entrepreneurs relief would be an option. You can probably pay the original company back the money and still get ER though - not 100% on this.

You may be able to split your company up into lots of little SEIS registered companies and have the investment activities as the 20% allowed non-qualifying activity. I suspect this would be quite tax efficient.

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ByteTheBitOP•

Thanks! Yeah, as the company is an investment company, I believe entrepreneurs relief wouldn't apply. I've avoided investing through my trading company so that it's seen as a trading company rather than an investment company so I can claim ER when the time comes. (That's if it's even a thing as the ER limit seems to be getting lower and lower ha!)

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tabac-en-paris•

You should change your post and acknowledge the post. The dividends you extract will be taxed eventually.

I’m not sure what you are achieving with this set up - which taxes are you avoiding ?

2
ByteTheBitOP•

Thanks for response. For instance, if I was to invest £1m personally vs through business:

£1m personally, I’d need to extract money at 32.5% which would leave me £675,000 to invest. After 10 years of 5% growth this would grow to £1,111,731. My gain of roughly £500k would be taxable at 20% CGT which would leave me with roughly £400k of gains. Totalling roughly £1.1m.

£1m through company, means I could invest £1m through dividend fund. After 10 years of 5% growth (through dividend payouts) it’d be worth roughly £1,647,009. With the majority of the gains being dividend income, in theory no tax to pay. At some stage I’d close the investment ltd company down and withdraw all the money at 20% CGT which would leave me with roughly £1.3m.

So essentially could be the difference between £1.3m through ltd company vs £1.1m personally. If the investment pot scales to £10m then could be quite a difference in the final tax bill 20% /£2m.

I think as others say, there is a fine line between saving a load of tax and it actually ending up being less tax efficient. Will try and find a tax planning which deals with ltd company investing.

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tabac-en-paris•

At some stage I’d close the investment ltd company down and withdraw all the money at 20% CGT which would leave me with roughly £1.3m.

I think you need to check with an accountant - because my accountant told me that purposefully leaving money in the business to wind it up later and use CGT rather than dividend tax is an evasion. have you checked with an accountant?

So essentially could be the difference between £1.3m through ltd company vs £1.1m personally.

actually - i think you should pay the tax and be happy with that. for what its worth - i have similar issues with big tax bills and my board colleagues do quite a lot of stuff to avoid (like paying their kids to work in their ltd). but i pay it... we're supposed to, its the right thing to do. you have a vast amount of wealth, i don't think you should avoid paying your fair share. we make a lot of money on the back of the society we have a share in - we should help pay for it.

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BigSARMS•

Many people break their companies activities down over seperate companies so that they can have multiple entities which are eligable for ER (or they sell off in parts), as far as I understand it this is fine. You are usually allowed to have a certain % of "non-qualifying activity" (such as the investment activities) and still claim ER - this is true with VCTs, EIS, SEIS, and similar, but I can't say I have checked for ER.

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nashbashcash•

Good question, interested to know answer to this as well

3
N9242Oh•

Me too

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krisolch•

See my answer

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krisolch•

The default position is that such dividends are indeed taxable. However, there are a number of exemptions which means that in practice most dividends are not taxable.

Chapter 2 of Part 9A of CTA 2009 refers.

https://www.accountingweb.co.uk/any-answers/dividends-received-by-uk-company-and-ct

https://www.legislation.gov.uk/ukpga/2009/4/part/9A/data.pdf

EXEMPTION OF DISTRIBUTIONS RECEIVED BY SMALL COMPANIES 931B Exemption from charge to tax A dividend or other distribution of a company that is received in an accounting period of the recipient in which the recipient is a small company is exempt if— (a) the payer is a resident of (and only of) the United Kingdom or a qualifying territory at the time that the distribution is received, (b) the distribution is not of a kind mentioned in [ F4paragraph E or F in section 1000(1) of CTA 2010] (certain non-dividend distributions), (c) no deduction is allowed to a resident of any territory outside the United Kingdom under the law of that territory in respect of the distribution, and (d) the distribution is not made as part of a tax advantage scheme.

Unit trusts and Open-Ended Investment Companies (OEICs) are professionally managed collective investment funds. A fund manager pools money from many investors and buys shares, bonds, property or cash assets and other investments.

I believe that your company is exempt from dividend tax as it is a small company that is not an OEIC. I have a similar setup but my companies are separate and not part of the same group.

3
ByteTheBitOP•

Interesting, thanks! This is the same logic as I was applying.

1
LMSWP•

This all depends on what sort of volume you are looking at.

Paying income tax ASAP and investing via ISA may be the best bet. It may not. You'll probably find a bit of both is best.

Don't forget Corp tax will be due, along with any income tax post gain.

Probably all nets off to something fairly similar at the end of the day.

3
ByteTheBitOP•

Thanks. Currently investing £50k per month from trading company. Main motivator is to invest pre-income tax so that I get bigger gains long term.

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dymockpoet•

You should take professional tax advice before doing this as in certain circumstances you can actually end up paying more tax doing it this way than just taking the money out and investing it in your personal account.

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shiftingshares•

Apologies if this isn't relevant but just curious as to why you're investing through a limited company.

You have £20,000 per annum ISA allowance.

There is also £12,300 in Capital Gains Tax allowance to be used.

You can also use spread betting too (this is leveraged but you can use them to mirror your intended positions rather than use them for gearing).

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ByteTheBitOP•

Thanks, the main motivator to invest though a ltd company is to avoid the hefty dividend tax (32.5%). As the business is profiting near 7 figures, seems a shame to pay such large amounts of dividend tax to then invest. Thought is to invest before dividend tax so I get more growth. At some stage, I’ll probably close the company and then pay capital gains (currently at 20%) instead of 32.5% and I’ll have the benefit of the extra pre-tax growth.

5
ramakitty•

At those figures, I would seriously suggest taking professional advice.

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tabac-en-paris•

Have you talked to an accountant - because this seems like it you will be liable for full dividends or even income tax when you close this business. You don’t describe very well what you are attempting to do, but the HMRC are not total morons and realise that people try to leave profits in a company to get lower tax, and don’t allow it.

Please get some professional advise about what is legitimate and post an update. Apart from anything else you should pay your taxes like everyone else has to, especially since you are earning quite a lot.

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ilovetheinternet1234•

realise that people try to leave profits in a company to get lower tax,

Just for clarification, you mean leave the money in and then wind it up, right? You can just leave retained earnings in a company without it being a problem, correct?

1
tabac-en-paris•

Different accountants will give you different opinions. But I believe the official line from HMRC is that the money left in the business has to be paid out as dividends in these kind of circumstances e.g.

https://www.crunch.co.uk/knowledge/tax/tax-implications-closing-limited-company/

So there's no problem doing it so long as the appropriate tax is paid.

1
shiftingshares•

Thanks for the response - I'm confused. Which dividend tax is this?

Any gains that are outside of an ISA in your personal account are taxed at 10% if you earn under £50k or 20% if you earn above £50k.

Gains inside a ltd company are classed as Corporation Tax (19%) and then you pay a dividend tax if you pay yourself a salary and withdraw dividends. You can expense things in the ltd co but usually 20% CGT works out better if you're making a lot imo.

1
AmatuerInvestor•

You won’t pay income tax or corporation tax on the dividends, like in an isa in that regard alone. All other taxes exist. Companies also pay corporate tax on disposal of assets not capital gains tax.

You also want to consider a holding company for you’re two ltd’s. This way both companies can pay dividend whenever they have profit into the holding company which can then do what it wants with the combined tax. Without it, you’d have to pay income tax to do this. This also helps segregate assets for liability purposes.

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ByteTheBitOP•

Thanks for your reply. The problem with a trading company and an investment company being under the same holding company is that it could be seen as an investment holding group rather than a trading holding group. This means when closing the trading company, entrepreneurs relief may not be possible. At the moment I have a holding company setup which owns my trading company. Initially I thought the same that it would make sense to have both companies as subsidiaries but my accountant corrected me and told me about the ER issues.

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AmatuerInvestor•

Ah, didn’t realise you’re thinking of closing the trading company. This makes sense.

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[deleted]•

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[deleted]•

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FAT-CHIMP-BALLA•

I like the brainstorming here

Is this structure worth it if I invest 2-5k a month ? I think we can invest around 2k a month . 24k a month .

Plan is :

  1. Setup company
  2. Do inter company loan of 15k
  3. Then loan 2k a month in additional capital
  4. End goal is to invest

25% in REITs 40%in fund 20% in stocks(fste 250) 10% in crpyto riskier trades 5% in riskier stocks Aim shares/otc market

Costs of running investment ltd Accountant fees Broker fees Bank fees 1200-1500 ?

1
truebluerb•

I don't but I have a Ltd company and may use this method 👌🏽

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stoneslfc•

Can anyone suggest some good dividend funds? I'm currently been mainly investing in FTSE Global All Cap through my company but its dividends is quite low at around 1.44%.

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lloyd877•

I think you still have to pay corporation tax on profits before issuing dividends from your other company.... so you are still paying 19% tax on the profits before it reaches the investment company. When that investment company makes a profit you will pay 19% corporation tax again on the investment unless it's from a dividend but that's not normally the main income from investing these days it's capital gains from selling growth stocks.

I would just make it simple and put it in a ISA. Edit: just seen you have 1m. I would still.max the ISA every year. I plan to till I'm 55 from 28 and it will give me plenty of tax free income once accumulated at 6% a year.

Source: Studying accountancy but this question is above what i have covered so far....

I would definitely seek financial advice based on the figures you are throwing a out in the other comments,this is way above the pay grade of a discussion on Reddit.

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ByteTheBitOP•

Thanks for your response! Yeah as you say, the complexity of all of this kinda makes me think just pay the tax and get on with life. Will be chatting with my accountant about this further. Cheers

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lloyd877•

No worries mate, yeah talk to the accountant but it seems like it's so much effort to do everything. You may aswell set the company up in a tax heaven and it wouldnt be much harder.

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[deleted]•

[deleted]

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ByteTheBitOP•

Are you sure about that? Dividends are taxable personally speaking but from my understanding, dividends being received by a ltd company are corporation tax exempt.

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tabac-en-paris•

But you then have to take the money out of that company as a dividend.

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diamondjungle•

Is there source for this? Inter-company dividends? Because it sounds like double-taxation. Those profits were already taxed.

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ByteTheBitOP•

Bit of a back story, my trading ltd company is owned by my holding ltd company. I pay dividends up from my trading company to the holding company through dividends. As it’s inter-company, I don’t pay corporation tax on the dividends received by the holding company to avoid the double taxation.

You could be right that investing in a fund isn’t inter-company which means dividends received from the fund are taxed.

Edit:

Here's a link which talks about dividends not being taxed when being received by a ltd company: https://www.foxymonkey.com/how-to-invest-your-company-profits/#7632

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krisolch•

see my answer

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