Corporate Investing

Unlock the potential of your company's surplus cash by investing it to generate additional revenue.

Corporate investing involves a company using its surplus cash to purchase investments with the goal of generating additional revenue and increasing its overall value.

Instead of keeping excess funds in a bank account, the company seeks to invest its profits to potentially earn higher returns.

Business owners can choose to pay themselves through dividends or a salary. However, withdrawing too much money from the business can lead to a significant tax bill. On the other hand, letting profits accumulate in the business account means that this money isn't being actively utilised for your company's growth.

Advantages

In recent years, Corporation Tax, which is applied to all profits a business makes and returns on any investments, has increased significantly.

Investing profits can be an attractive strategy for small business owners to reduce their tax liabilities.

While some choose tax-efficient options like pensions for their excess profits, others prefer to invest through their business.

Some of the other advantages include:

diversifying into various securities and assets can provide your business with multiple revenue streams
this approach could potentially increase your income, allowing you to reinvest more money back into your business
by investing your surplus cash, you give it the opportunity to grow, rather than letting it sit in a savings account with a low interest rate.

Disadvantages

It's essential to determine your risk tolerance before engaging in corporate investing.

Even if you decide to invest cautiously in historically stable securities or assets, you could still incur losses if the investment market crashes or you might not achieve returns that exceed cash returns. Running a company involves inherent risks, and successful business owners typically possess a strong understanding and tolerance for those risks.

Disadvantages could include:

Corporate investing may not be suitable if you need immediate access to cash for cashflow.
Seasonal businesses or those without a steady stream of clients may find tying up money impractical.
Planning significant investments in the near future can also make corporate investing a concern.

Opportunities and reliefs available

Taxation of investments

Companies are subject to Corporation Tax on the income and gains they receive from their investments.

The taxation of company-held investments depends on the accounting basis the company uses and the type of investments held. The size and nature of a company determine the accounting standards it can adopt, so this should be verified with the company's accountant.

If a trading company qualifies as a micro-entity, it can use the historic cost basis of accounting for all its investments, including cash, investment bonds, and Open-Ended Investment Companies (OEICs). Historic cost accounting means that tax is only payable when a withdrawal is made during the accounting period. Companies classified as 'investment companies' do not qualify as micro-entities.

Holding micro-entity status allows for tax deferment, enabling the company to plan the timing of withdrawals to its advantage. For example, a withdrawal could be made in a year when there are losses available to offset against investment gains.

To be eligible for the micro-entity regime, a company must meet at least two of the following criteria:

turnover: £1,000,000
balance sheet: £500,000
an average of 10 employees or fewer.

For all other companies, the type of investment determines how it is accounted for and subsequently taxed.

Investment bonds

A company-owned investment bond or capital redemption bond is assessed for Corporation Tax under the loan relationship rules, rather than the chargeable event legislation.

Generally, companies that are not classified as micro-entities must use the fair value accounting basis for their bond investments. Under this method, the investment bond is valued at its market value, specifically the surrender value at the end of each accounting period. Any growth or loss relative to the previous accounting period's value (the carrying value) will be included in the loan relationship account and subject to corporation tax. There is no tax deferral; thus, gains are taxed each year, even if no withdrawals are made.

Unit trusts/OEICs

The taxation of income and gains from Open-Ended Investment Companies (OEICs) or unit trusts for corporate investors depends on the composition of the fund's underlying assets.

If a fund manager invests more than 60% of the fund in cash or fixed interest assets (such as gilts and corporate bonds), the fund will be classified as a non-equity fund. In this case, income will be treated as an interest distribution.

Conversely, if the fund contains less than 60% in cash or fixed interest assets, it will be classified as an equity fund, and income will be treated as a dividend distribution.

Other investments

As well as investment bonds and non-equity mutual funds, the loan relationship rules cover most other corporate investment vehicles such as:

bank or building society deposits
gilts
corporate bonds
capital redemption policies
certain life assurance policies.

Impact on IHT relief

Individuals who own a share of an unquoted trading business typically qualify for Inheritance Tax (IHT) business property relief (BPR) after two years of ownership. However, cash accumulated in the company bank account or investments held within the company may be classified as 'excepted assets' which do not qualify for BPR.

Generally, cash and investments within the business are considered excepted assets unless they have been actively used in the business during the previous two years and are held at the time of transfer for a specific future business purpose, such as a planned project or acquisition. While a business that holds excepted assets might still qualify for BPR, the relief will not apply to the value of those excepted assets.

There is an additional risk if the company has excessive levels of cash or investments. BPR could be entirely lost if the business is primarily seen as an investment entity rather than a trading one. If there is any uncertainty, the business should consult its tax advisers.

Starting from April 6, 2026, only the first £1 million of business assets will qualify for 100% BPR relief. Assets valued over £1 million will be eligible for 50% relief.

Impact on CGT relief

Business owners may take advantage of Business Asset Disposal Relief (previously known as entrepreneurs' relief) when disposing of their business interests. This relief allows for a reduced Capital Gains Tax (CGT) rate of 10% on disposals up to a cumulative lifetime limit of £1 million for transactions made on or after 11 March 2020. However, starting from 6 April 2025, the CGT rate will increase to 14%, and then to 18% from 6 April 2026, applicable to disposals up to £1 million.

It is important to note that, similar to Business Property Relief (BPR), this relief is only available for trading businesses and not for investment businesses. Holding substantial cash and other investments can jeopardise a company’s 'trading' status. The application of BADR is an all-or-nothing scenario; if cash and investments lead to a loss of this relief, it will affect the entire value of the disposed business, not just the non-trading assets.

According to the legislation, a ‘trading company’ is defined as a company that predominantly engages in trading activities and does not conduct other activities to a significant extent. HMRC considers ‘substantial’ to mean more than 20%. However, this determination is not solely based on the value of investments shown on the company’s balance sheet. It is assessed based on various factors, including the time spent managing investments and revenues generated from non-trading activities. Ascertaining whether the 20% threshold could be breached requires specialised tax advice.

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Crowe Financial Planning UK Limited is authorised and regulated by the Financial Conduct Authority (‘FCA’) to provide independent financial advice.

The information set out in this page is for information purposes only and is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. It does not constitute advice to undertake a particular transaction. Appropriate professional advice should be taken on specific issues before any course of action is pursued. Any advice provided by a Crowe Consultant will follow only after consideration of all aspects of our internal advice guidance.

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