Investing spare cash within LTD company – risks of losing trading status?

NorthernJoe

Seeking collective wisdom of the forum.

 

Going forward, it looks like I will have a relatively large surplus of cash sitting in my LTD company account (myself & wife owners/directors). The company provides private medical services (VAT exempt). 

 

I am keen to invest this excess cash in equities longer-term. I have an InvestEngine account for LTD co & have been putting my expected corporation tax bill into money market funds to at least get some return while I plan all this out.

I would however like to invest the majority of the extra cash into a longer-term multi-asset funds - I’m comfortable with actual investments/risks etc. 

I already invest maximum into DB pension scheme (>60k growth/year) & max out personal/children’s ISAs etc. I know I would have to pay corporation tax on any realised gains. 

 

However, I was wary of the implications of losing “trading company” status and being considered an “investment company” by HMRC. 

 

I am less concerned about the potential loss of business asset disposal relief (BADR) as this is being reduced in any case (I suspect will disappear altogether in the future) I am also not particularly concerned regarding inheritance tax issues as still relatively young & plan to use the money in the company to ultimately fund an early retirement.

 

I have read conflicting information on the other consequences of being an investment company vs trading company. 

 

As part of my current practice, I have considerable tax-deductible expenses (“wholly and exclusively” for practice) e.g. room hire/admin etc. 

 

I have spoken to my accountant about this who has stated there is no issue & I would not lose the right to continue to claim current expenses even if considered an investment company. 

 

Is this correct? Are there any other issues I perhaps haven’t considered?

 

Many thanks 

Grumpy_chap

NorthernJoe said:

Seeking collective wisdom of the forum.

 

Going forward, it looks like I will have a relatively large surplus of cash sitting in my LTD company account (myself & wife owners/directors). The company provides private medical services (VAT exempt). 

 

I am keen to invest this excess cash in equities longer-term. I have an InvestEngine account for LTD co & have been putting my expected corporation tax bill into money market funds to at least get some return while I plan all this out.

I would however like to invest the majority of the extra cash into a longer-term multi-asset funds - I’m comfortable with actual investments/risks etc. 

I already invest maximum into DB pension scheme (>60k growth/year) & max out personal/children’s ISAs etc. I know I would have to pay corporation tax on any realised gains. 

 

However, I was wary of the implications of losing “trading company” status and being considered an “investment company” by HMRC. 

 

I am less concerned about the potential loss of business asset disposal relief (BADR) as this is being reduced in any case (I suspect will disappear altogether in the future) I am also not particularly concerned regarding inheritance tax issues as still relatively young & plan to use the money in the company to ultimately fund an early retirement.

 

I have read conflicting information on the other consequences of being an investment company vs trading company. 

 

As part of my current practice, I have considerable tax-deductible expenses (“wholly and exclusively” for practice) e.g. room hire/admin etc. 

 

I have spoken to my accountant about this who has stated there is no issue & I would not lose the right to continue to claim current expenses even if considered an investment company. 

 

Is this correct? Are there any other issues I perhaps haven’t considered?

 

Many thanks 

What is the turnover of the company?
What is the investment income that the company will achieve?
You don't need to share actual numbers if you prefer not to, but ratios.

Some of your comments are also unclear as you refer to the Ltd Co. having excess cash on deposit, but also investments made in ISA's in your own name / wife's name / children's name. 
The Ltd Co. cannot invest funds in your ISA account (or your wife's / children's ISAs).
How are these funds drawn from the business before being invested in the ISAs?  

Are you aware that the money in the ISA in your children's names (a generous gift from you possibly) is now your children's asset to do with as they wish and cannot be used to fund your early retirement?

You mention that both you and your wife are Owner / Directors of the Ltd Co, yet only mention £60k per year into DB pension.  Have you contributed any available carry forward for both of you to DB pension?  Why are you not making £60k each pension contributions?  These can be all "employer contributions" which is the most tax / NI efficient.

You have not said much about what the company does, only that is provides "medical services" which is a very broad category.  Is it possible that the best thing to do with the capital that is available is to re-invest into the business to scale up and expand to a much larger organisation?

Again, you do not need to give exact numbers, but what order of magnitude is the "relatively large surplus of cash"?  It makes a difference what the best thing to do is whether that means £10k, £100k, £1m, £10m.  It also makes a difference as to the appropriate professional advice you might seek.

You have not mentioned your ages, only that you are "relatively young".  Age and years remaining to the early retirement may be influential on what the best actions are.

NorthernJoe

Thanks - really appreciate you taking time to reply - have responded as best I can below 

Grumpy_chap said:

What is the turnover of the company?
What is the investment income that the company will achieve?
You don't need to share actual numbers if you prefer not to, but ratios.
Annual profits of £150-200k currently. Don't need to drawn upon any of it at present so would hope to invest majority (70%) & retain 20-30% or so per year for running costs & corp tax bill etc

Some of your comments are also unclear as you refer to the Ltd Co. having excess cash on deposit, but also investments made in ISA's in your own name / wife's name / children's name. 
The Ltd Co. cannot invest funds in your ISA account (or your wife's / children's ISAs).
Mentioned for illustration only i.e. that drawing money from LTD co to invest personally probably isn't very tax efficient

How are these funds drawn from the business before being invested in the ISAs?  
Two jobs - personal investments from primary employment income (PAYE) - haven't drawn anything from the company (both additional rate tax-payers from primary employment)

Are you aware that the money in the ISA in your children's names (a generous gift from you possibly) is now your children's asset to do with as they wish and cannot be used to fund your early retirement?
Aware yes - I know I have to trust them not to blow it all but kids (thus far) are sensible & have keen interest in personal finance. Hoping they do the right thing but appreciate its theirs to do as they wish 

You mention that both you and your wife are Owner / Directors of the Ltd Co, yet only mention £60k per year into DB pension.  Have you contributed any available carry forward for both of you to DB pension?  Why are you not making £60k each pension contributions?  These can be all "employer contributions" which is the most tax / NI efficient.
Apologies if not clear - we contribute maximum into workplace pension - deemed growth consistently >£60k for both of us even with carry-forward. Both incur a modest AA bill each year which is largely outside of our control (defined benefit schemes). "Good" problem to have, I know. 

You have not said much about what the company does, only that is provides "medical services" which is a very broad category.  Is it possible that the best thing to do with the capital that is available is to re-invest into the business to scale up and expand to a much larger organisation?
Possible but probably close to maximum working capacity currently. 

Again, you do not need to give exact numbers, but what order of magnitude is the "relatively large surplus of cash"?  It makes a difference what the best thing to do is whether that means £10k, £100k, £1m, £10m.  It also makes a difference as to the appropriate professional advice you might seek.
Approx 150-200k/year surplus - if goes well, could be £1.5-2m in next 10-15 years. Hence keen not to lose out to inflation over that timeframe. Yes, I know for that sum of money, it might be worth seeking professional investment advice but really, I'm just trying to understand the accountancy/tax implications at present 

You have not mentioned your ages, only that you are "relatively young".  Age and years remaining to the early retirement may be influential on what the best actions are.
Both early 40s - would like option to retire at 55 though currently enjoy work. 

Any further comments very welcome. 

Really my main concern was around losing "trading" status and HMRC considering it an investment company. 

My accountant says this doesn't make an appreciable difference other than potential BADR. 

Albermarle

Is it not unusual for a small private company to have a DB scheme ?

QrizB

Albermarle said:

Is it not unusual for a small private company to have a DB scheme ?

I read the DB scheme as being from their "day job" (NHS perhaps?) with the Ltd Co being their side hustle (a terrible phrase but it conveys my meaning).

Grumpy_chap

QrizB said:

I read the DB scheme as being from their "day job" (NHS perhaps?) with the Ltd Co being their side hustle (a terrible phrase but it conveys my meaning).

Yes, that might be what it is.

The OP had a recent post where they were considering an EV car through their Ltd:
https://forums.moneysavingexpert.com/discussion/6537990/new-ev-through-ltd-co-in-practice/p1

NorthernJoe said:

NHS doctor with private practice. I am contemplating setting up a LTD company for private work mainly to try to reduce pension AA charges. 

So, if the OP (and OP's wife) are both employed NHS, and maxing the £60k per year to NHS pension (which is probably better than any DC pension), then there is no option for the Ltd Co. to make additional pension contributions.

It would help if the OP shared the full details of their situation to allow full consideration to be given in responses.


Anyway, with the additional information now available, it seems as though the OP and OP's wife are both employed in NHS, with good primary incomes.
In addition, the OP plus OP's wife have a private medical practice.  "Profits" after meeting the direct expenses are £150k - £200k per year, but this "profit" has not allowed for personal draw down / salaries (as not required).

The Ltd Co., it would seem, cannot make pension contributions as this is all done via the NHS and maxed out allowances.
The EV remains an option - it may already have been taken.

For the OP's current age (early 40) and target retirement (55), they will not be able to access pension funds that young so will need a resource available to draw upon from age 55 until whatever age (by then) the rules allow access to pension funds.

One option for the OP to consider as an investment by the business would be freehold acquisition of operating premises.  This would definitely be linked to the trading activity and build capital while also reducing the operating costs.  I do not know whether this is viable for the OP as it depends on what medical services are offered.  Might be quite common for a Dentist, perhaps less so for a Heart Surgeon.

NorthernJoe

QrizB said:

Albermarle said:

Is it not unusual for a small private company to have a DB scheme ?

I read the DB scheme as being from their "day job" (NHS perhaps?) with the Ltd Co being their side hustle (a terrible phrase but it conveys my meaning).

Yes, apologies - no intention to be cryptic - both NHS consultants with private practice (LTD Co)  

Tried to avoid "side hustle" but yes, conveys the situation well! 

poseidon1

NorthernJoe said:

QrizB said:

Albermarle said:

Is it not unusual for a small private company to have a DB scheme ?

I read the DB scheme as being from their "day job" (NHS perhaps?) with the Ltd Co being their side hustle (a terrible phrase but it conveys my meaning).

Yes, apologies - no intention to be cryptic - both NHS consultants with private practice (LTD Co)  

Tried to avoid "side hustle" but yes, conveys the situation well! 

If your ultimate objective is for the accumulated capital in the business to assist you both on the road to early retirement, I assume it would be your desire to eventually liquidate the company at the lowest exit tax possible.

This then infers you will be seeking eligibility for business asset disposal relief ( BADR) to limit the  CGT rate on eventual liquidation to 10% ?

However your opening post indicated your wariness of your trading business 'morphing' into an investment company ( in the eyes of HMRC), thereby potentially failing BADR criteria per below


https://www.gov.uk/business-asset-disposal-relief

I found an interesting query which bore comparisons with your circumstances see below


https://www.accountingweb.co.uk/any-answers/business-asset-disposal-relief-eligibility

The difference there is the company owner made a one off investment into an investment bond, whilst you are considering a potential series of equity investments of your annual surplus. If those equity investments are  even moderately successful, its not difficult to see the return from those eventually exceeding your trading activity over the time horizons you mentioned.

I suppose the issue for you is having borne corporation tax at between 19% to 25% on annual corporate profits, you would be somewhat miffed at subsequently suffering CGT on exit at  the current 24% rate  having potentially lost BADR. 

Grumpy_chap's mention of a commercial trading premises ( instead of equity investments), may offer a viable alternative, although that comes with its own different set of costs and administrative challenges and is no longer a one way route to guaranteed  future capital appreciation. However it should certainly address the BADR issue.

NorthernJoe

Thanks - I think BADR is rising to 18% next year? 

I suspect it will rise further or be abolished altogether longer term hence, I'm less concerned about "losing" out on this particular relief.

I was just wondering if there are other aspects of changing from a trading company to an investment company I hadn't considered? 

poseidon1 said:

If your ultimate objective is for the accumulated capital in the business to assist you both on the road to early retirement, I assume it would be your desire to eventually liquidate the company at the lowest exit tax possible.

This then infers you will be seeking eligibility for business asset disposal relief ( BADR) to limit the  CGT rate on eventual liquidation to 10% ?

However your opening post indicated your wariness of your trading business 'morphing' into an investment company ( in the eyes of HMRC), thereby potentially failing BADR criteria per below

poseidon1

NorthernJoe said:

Thanks - I think BADR is rising to 18% next year? 

I suspect it will rise further or be abolished altogether longer term hence, I'm less concerned about "losing" out on this particular relief.

I was just wondering if there are other aspects of changing from a trading company to an investment company I hadn't considered? 

poseidon1 said:

If your ultimate objective is for the accumulated capital in the business to assist you both on the road to early retirement, I assume it would be your desire to eventually liquidate the company at the lowest exit tax possible.

This then infers you will be seeking eligibility for business asset disposal relief ( BADR) to limit the  CGT rate on eventual liquidation to 10% ?

However your opening post indicated your wariness of your trading business 'morphing' into an investment company ( in the eyes of HMRC), thereby potentially failing BADR criteria per below

Losing IHT 100% Business Property Relief if you both die before liquidating the company?