The pros and cons of holding investments in companies

Can I hold investments in a company?

Yes, you can hold investments in a company, and many investors do exactly that.

Holding investments in a company can add a layer of protection and allow you to accumulate income in a more tax-efficient environment than if they are held personally. However, you should ask yourself some key questions:

• Do I need the income generated from these investments?
• What type of investments will be held in the company?
• How long do I see this sort of structure being in place?

What about holding investments in my existing company?

If your existing company is a trading company, then care should be taken when considering where to hold investments.

Whilst it can be sensible to put excess cash to good use as opposed to holding it in the bank, business owners should be mindful that holding investment assets in a trading business could restrict the availability of certain favourable tax reliefs.

If there are any plans to sell your business in the future, you may benefit from Business Asset Disposal Relief for Capital Gains Tax where the business is a trading business. Holding investments within the company could jeopardise the availability of the relief.

Additionally, holding investment assets in a business can jeopardise the availability of Business Relief (relief from Inheritance Tax). The conditions for Business Relief to apply need careful consideration on a case by case basis.

Ahead of making any investment decisions it is always sensible to consult with your tax adviser and financial planner who can work with you to make sure that your company structuring is as tax efficient as possible.

The pros and cons of holding investments in non-trading / investment companies

Holding investments in an investment company instead of personally can be advantageous but can also add a layer of complexity.

There is a higher administrative burden of running a company with annual accounts, tax returns and Companies House filings required. However, for those that are already familiar with running a company this may not be a deal breaker.

Income can be accumulated within a company more tax efficiently than if held personally. Corporation Tax rates can be lower than those that are paid by an individual, and dividends are generally not taxable for corporation tax purposes. The exact rate of Corporation Tax will depend on the types of assets held in the company but will typically be between 19% and 25%. Post corporation tax profits retained in the company can be reinvested tax efficiently, deferring any personal tax.

The type of assets which the company invests in should be considered in detail, typically by working closely with your tax adviser and financial planner/investment manager. Investments which may be beneficial to hold personally may not be available to a company or may not attract the same tax benefits (such as ISAs and Enterprise Investment Scheme investments).

The timing and method of how income and capital flow through to shareholders can be controlled by the Directors, allowing personal tax charges to be managed efficiently. Some shareholders might not need a regular income stream, others might have little in the way of personal income and have unused tax-free allowances (such as the Personal Allowance or the tax-free dividend allowance) to utilise.

Shareholders receiving amounts in excess of these tax-free allowances may be subject to income tax at up to 45%. Therefore, company profits could be subject to double taxation, firstly Corporation Tax in the company and secondly Income Tax on extracting funds from the company.

There may also come a time when access is needed to the funds within the company, or the company is no longer tax efficient. Again, an additional layer of taxation could be payable if shares in the company are sold, gifted or the company is wound up.

Holding investments within a company is generally more advantageous when it is intended that the structure be used for building long-term wealth and where individuals are looking at their wider inheritance tax and estate planning.

Key takeaways

A company holding purely investments will not qualify for Business Relief; however, where a company is formed as part of estate planning, shares can be structured across family members so that any capital growth in a company can be attributed to the next generation. 

Whether you are a business owner with excess cash in the business or an individual investor deciding on the most tax-efficient way of holding investments, it is key to discuss your intentions with your tax adviser and financial planner in advance. Getting the structuring right from the outset can preserve any available reliefs and, more importantly, prevent incurring any unnecessary tax charges in trying to move investments from one structure to another.