Beating business savings interest rates with Money Market Funds

koru

I'm posting this partly to share what I've worked out and partly in case anyone has any comments to add.

At the time of this post, the best instant access savings rate for businesses seems to be about 3.15% (Recognise Bank). One way to get a lot higher rate than this is for the business to buy a money market fund (MMF) instead. (Individuals can do this too, but it probably isn't worth it when you can get 4.6% on a personal savings account.)

MMFs are OEICs or ETFs that invest the fund in cash and cash equivalents, aiming to get a return close to SONIA, which is the rate banks charge each other for overnight lending. SONIA is currently 4.93%, so after fund manager fees a sterling short term MMF should give a current return of around 4.7-4.8%. If the BOE rate changes, the return on the MMF is likely to change by the same amount.

MMFs are very slightly more risky than a savings account, so do your research and make sure you are happy to accept the risk for the extra ~1.5% interest rate. A good starting place is here: https://monevator.com/money-market-funds/, but bear in mind that the article is weighing the risk against the much smaller gap in interest rates for personal savings accounts.

You need to buy the MMF through a platform, so you need to choose one that will let your business open an account. Not many platforms allow this for limited companies, but the following do: Interactive Investor, A J Bell, InvestEngine, Wise Business, Interactive Brokers (IB). Most seem to have quite high fees that are going to erode your interest rate benefit. Interactive Investor, for instance, charges an extra £30 per month for a company.

IB seems the best value, as there is no platform fee and just a charge of €5 per fund sale/purchase. I'm in the middle of opening an account with them, which isn't easy, as they require a lot of information. You need to fill in a US form W-8BEN-E for the US FATCA rules, which requires a bit of work to decide what kind of entity your company is. (Active NFFE, I decided, for my company.) But their help desk is VERY helpful. They even pulled some of the information from Companies House for me.

The other cost is that with any platform a company needs a LEI. IB will do one for US$60 and US$50 per annual renewal. Or you can get your own from various providers. leiservice.co.uk seems to be the cheapest, at £39 per year. At current FX rates, $50 is about £39, so IB is only $10 extra for the first year. 

koru

For anyone else who decides to get a LEI via IB, the form asks a few questions that might be confusing. Here's what I learnt from customer service:

If you, as an individual, own the company then you should select that the direct parent and ultimate parent are natural persons.

The EMIR counterparty type is almost certainly NFC-. If you were one of the other types, you'd know it.

"Commercial activity or treasury financing" means hedging. If you are hedging, you'd know it.

koru

From what I understand on the tax treatment of a MMF when held by a company, if you buy income units they pay what is described as a dividend, but for tax purposes it is treated as interest. Some pay dividends monthly, some half yearly.

In between dividends, the price of the units reflects the accruing income. This can give rise to a gain on sale, but for a company the gain is going to be taxed at the same rate as interest income.

I think that if you hold the units at year end you have to mark to market, so unrealised returns are taxable. I'm not sure about this, but I'll be selling before year end, so haven't nailed this down.

If you buy acc units, the tax treatment is the same, except the dividends are reinvested, so you need to know what dividend the company earned.

If you buy an offshore fund, you may need to deal with Excess Reportable Income, though I'm not sure if this applies for corporation tax. I'm not sure there's a reason to prefer an offshore fund, so best to avoid this complication.

Bottom line is that I think the company is going to end up paying CT on all the returns, one way or another.

koru

Actually, SONIA went up to 5.18% last Thursday, so the MMFs should be delivering more like 5% net returns.

Sorry to keep adding bits. I'm not trying to persuade anyone; I'm really just updating as I find out new things.

ComicGeek

Just seems like a lot of risk and hassle for limited return. For every £100,000 invested you MIGHT make an additional £1000-2000 a year over a high rate savings account, less corporation tax etc.

My company doesn't need quick access to savings as monthly overheads are small, so have a 95 day access account at 4% interest. If it's a choice between a guaranteed £4k interest, or a gamble at £5k, I know which one I would pick - if it was a higher return then it might be worth doing, but not sure how that risk level would sit with my duties as a company officer to exercise reasonable care, skill and diligence. 

koru

Fair enough. It definitely shouldn't be done without being aware of the risk and weighing it up in the circumstances of the particular company.

I'd agree on the hassle. I have managed to open an account with IB, but it took some effort. Then again, I wanted to try them out as a possible place to transfer my own ISA, so I was willing to persevere.

I wouldn't agree on it being 'a lot' of risk. On the spectrum of investment risk, it is about as low as you get, except putting money on deposit in a bank. It just isn't completely risk free. The main risk is that in some sort of economic disaster you might not get access to your money instantly, but I could provide emergency liquidity to my company if this unlikely scenario happened.

The risk/reward comparison is different if your realistic alternative is the higher rate you can get for a 3m deposit. I would not want the hassle of having to predict my cash needs 3 months in advance, but many companies will do these projections anyway, so they are better equipped to take the risk of locking their money away for 3 months.

koru

In case it helps anyone else, here's an update on my experience.

Although IB do provide access to some UK OEICs (or mutual funds as they insist on calling them), there are quite a few gaps in their range. In particular, they have none of the UK fund groups that have MMFs that I was considering: Fidelity, Royal London, BlackRock. They have loads of offshore funds, but none that I would want to go for. There's an ETF listed in London, Lyxxor Smart Cash (CSH2), which would probably be the best option.

My IB account is still blocked from trading, as they say I don't have a LEI, even though I applied for them to arrange one 4 days ago. I've lost patience with them and I'm going to use InvestEngine instead. I originally skipped them as they only do ETFs, but as I'm forced to use an ETF with IB this is not a differentiator. InvestEngine seem much easier to set up the account and they give you a free LEI for the first year and £45 in future years (or free if you fund your account with £20k or more).

koru

InvestEngine has some helpful information about taxation for a company: https://help.investengine.com/hc/en-gb/articles/4911237788317-How-are-investment-returns-from-my-InvestEngine-Business-Account-taxed-

koru

InvestEngine was VERY easy to set up and get into operation. Highly recommended for companies that wish to open an investment account (as long as you are happy with ETFs).

cpx2

@koru - I'm looking into this too.
I'm just interested in the MM funds - see https://www.ii.co.uk/analysis-commentary/highest-yielding-money-market-funds-park-your-cash-ii527664
You mention that WRT IB " In particular, they have none of the UK fund groups that have MMFs that I was considering: Fidelity, Royal London, BlackRock." - also mentioned in the ii article.
Does InvestEngine have a large range of MMFs? I found this page - https://investengine.com/etfs/collections/money-market-funds/ - that mentioned two. But not the big name ones in the II article.
As you say II's charges seem excessive if you just want to save - not trade.

waveneygnome

Following too......

From what I've read, IE has only 2 MMF: 

XSTR - distributing ETF, OCF 0.1%, dividends paid twice a year

CSH2 - accumulating ETF, OCF 0.1%, no dividends (as its accumulating along the way as income is received into the fund)

XSTR is the smaller of the 2 funds £73m vs CSH2 £3450m......which may/maynot be a factor on liquidity in case there was a run on the fund.

CSH2 may be harder (?) to unpick the 'income' received in the year to declare on your companies accounts/pay relevant Corp Tax due.

(Found the opening of the account with IE very smooth, but have yet to press any more bottons)