Up to 30 CPD minutes
Introduction
Many businesses have surplus capital which isn’t needed for the day to day running of the business. Business owners need to consider whether to invest rather than distribute to shareholders.
The taxation of company held investments is very different to how they are taxed when held personally. It is therefore essential to understand the ongoing tax implications when advising business clients on their investments.
This module should take around 30 minutes to complete. Once you have completed all the sections there is a short self-assessment quiz to check what you have learned and a CPD certificate for up to 30 minutes can be claimed.
Outcomes
On completion of this module you should be able to:
Illustrate how holding company investments impacts business owners’ reliefs for IHT and CGT
Explain how investment bonds may be taxed when held by a company
Describe the difference in taxation between company owned equity and non-equity collective investments
Learning material
This module covers the tax implications for companies which hold investments. It highlights what business owners need to be aware of when investing in investment bonds and OEICs/unit trusts.
CPD minutes: up to 30
Read the Taxation of corporate investments guideopensInNewWindow
Post learning assessment
Question 1
Entrepreneur’s relief may be lost if a business has substantial non trading activities. Which of the following may influence HMRC’s decision to deny the relief? (More than one option may apply)
a. Cash and investments make up more than 20% of the assets on the balance sheet
b. Revenues for non-trading activities make up more than 20% of the overall revenue
c. The business spends more than 20% of its time managing investments
d. Cash used in the day to day running of the business
Question 2
Company owned investment bonds are assessed for corporation tax under the loan relationship rules. What basis generally applies to companies which are not micro-entities?
a. Fair value basis – with growth or losses assessed each accounting period
b. Historic cost basis – with growth or losses deferred until proceeds are withdrawn
c. Fair value basis – with growth or losses deferred until proceeds are withdrawn
d. Chargeable event rules apply – with tax only payable when there is a chargeable event i.e. on surrender or withdrawals in excess of 5% allowance
Question 3
A company invests in a unit trust which consists of 50% equities and 50% fixed interest. Which of these statements correctly describes how any income is taxed?
a. Income is distributed as all interest and is paid gross and subject to corporation tax.
b. Distributions are only taxed on disposal, with corporation tax due on any gains.
c. Income is distributed as all dividend which is treated as franked investment income and no corporation tax is payable.
d. Income is streamed into its component parts, dividends will be treated as franked investment income with corporation tax payable on them, and interest will be treated as unfranked income which is subject to corporation tax.
Check your answers
Entrepreneur’s relief may be lost if a business has substantial non trading activities. Which of the following may influence HMRC’s decision to deny the relief? (More than one option may apply)
a. Cash and investments make up more than 20% of the assets on the balance sheet
b. Revenues for non-trading activities make up more than 20% of the overall revenue
c. The business spends more than 20% of its time managing investments
Company owned investment bonds are assessed for corporation tax under the loan relationship rules. What basis generally applies to companies which are not micro-entities?
a. Fair value basis – with growth or losses assessed each accounting period
A company invests in a unit trust which consists of 50% equities and 50% fixed interest. Which of these statements correctly describes how any income is taxed?
d. Income is streamed into its component parts, dividends will be treated as franked investment income with corporation tax payable on them, and interest will be treated as unfranked income which is subject to corporation tax.
Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circ*mstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.
Insights, advice, suggestions, feedback and comments from experts
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Taxation of Company Held Investments
When businesses have surplus capital that isn't needed for day-to-day operations, they often consider investing it rather than distributing it to shareholders. The taxation of company-held investments differs significantly from personal investments, and it's crucial to understand the ongoing tax implications when advising business clients on their investments.
This module covers the tax implications for companies holding investments, including investment bonds and OEICs/unit trusts. It aims to help business owners understand the impact of holding company investments on reliefs for Inheritance Tax (IHT) and Capital Gains Tax (CGT), the taxation of investment bonds when held by a company, and the difference in taxation between company-owned equity and non-equity collective investments.
Concepts in the Article
Entrepreneur's Relief and Non-Trading Activities:
- Entrepreneur's relief may be lost if a business has substantial non-trading activities. Factors that may influence HMRC's decision to deny the relief include:
- Cash and investments making up more than 20% of the assets on the balance sheet.
- Revenues for non-trading activities making up more than 20% of the overall revenue.
- The business spending more than 20% of its time managing investments.
Company-Owned Investment Bonds and Taxation:
- Company-owned investment bonds are assessed for corporation tax under the loan relationship rules. For companies that are not micro-entities, the fair value basis applies, with growth or losses assessed each accounting period.
Taxation of Income from Unit Trust Investments:
- When a company invests in a unit trust consisting of 50% equities and 50% fixed interest, the income is streamed into its component parts. Dividends are treated as franked investment income with corporation tax payable on them, and interest is treated as unfranked income subject to corporation tax.
These concepts are essential for business owners and advisors to understand the tax implications of company-held investments and make informed decisions regarding their investment strategies.
Conclusion
Understanding the taxation of company-held investments is crucial for business owners and advisors. It involves considerations such as the impact on reliefs for IHT and CGT, the assessment of company-owned investment bonds for corporation tax, and the taxation of income from different types of investments. By grasping these concepts, business clients can make informed decisions about their investments and navigate the associated tax implications effectively.
