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Investing my company cash in low interest world

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
appleyard
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Investing my company cash in low interest world

#348881

Postby appleyard » October 19th, 2020, 10:37 am

I have a semi-dormant company (I am a consultant hence my own company, but have returned to paid employment with another company), which over a decade has accumulated around 500K cash on the balance sheet. I can't liquidate the company as I may return to be a consultant, nor can I overpay on dividends as it would attract a substantial tax bill. So the plan is to earmark the cash for the SIPP pensions of me and my wife (who both co-own the business) - hence each year the company would pay maximum pension contributions of 40K each, which is a very tax-efficient way of withdrawing cash from the business.

However, in the meantime, I have cash in the business (as the pension contributions deplete the amount over several years) - which is attracting 0% interest. I have a reasonable appetite for risk - so the plan is for each year to make a director loan to me and my wife - and invest the cash in a global tracker (single or selection), and sell the holding at the end of each year to return the cash to the business for tax purposes (similar to bed and breakfast - which would also realize any capital gains or losses). I am not looking for racey investment performance, probably 6% a year - and favour ETF's as they avoid stamp duty (I have no interest in investing in property). The real investment objective is to get a return on cash in the company, which otherwise would be earning 0% interest - and eventually transition the cash into our pensions. Both me and my wife are higher rate tax payers.

Questions:
1. Is this a sensible investment strategy?
2. What would be sensible ETF investments? Or should I consider something else?
3. Does it make sense to focus on capital growth - as have unrealised capital gains allowances, but pay high income tax.

Clarifiications:
1. I could withstand a reduction of any fund of about -20% - as have enough personal cash to make up any shortfall when returning cash back to the business each year.
2. This is a little complicated process - so want to keep the investment side at simple as possible.
3. This is probably a 5-6 year process - so except that the tax environment could change.
4 I have dismissed holding investments in the company for tax purposes.

Would welcome any thoughts, or insights as I embark on this journey.

puffster
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Re: Investing my company cash in low interest world

#348886

Postby puffster » October 19th, 2020, 10:54 am

You could put some of your company money into a business savings account. Virgin Money have one that pays 0.4% and I'm sure there are better rates available elsewhere.

Regards, Puffster

mc2fool
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Re: Investing my company cash in low interest world

#348898

Postby mc2fool » October 19th, 2020, 11:23 am

appleyard wrote:I have a semi-dormant company (I am a consultant hence my own company, but have returned to paid employment with another company), which over a decade has accumulated around 500K cash on the balance sheet. I can't liquidate the company as I may return to be a consultant, nor can I overpay on dividends as it would attract a substantial tax bill. So the plan is to earmark the cash for the SIPP pensions of me and my wife (who both co-own the business) - hence each year the company would pay maximum pension contributions of 40K each, which is a very tax-efficient way of withdrawing cash from the business.

You probably know this already, but just in case not ... the £40K maximum pension contribution each year (that you can get tax relief on) is across all sources and into all schemes, so if you and/or your employer from your paid employment is contributing to a pension then you need to subtract that.

BigTim
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Re: Investing my company cash in low interest world

#348913

Postby BigTim » October 19th, 2020, 11:55 am

One point: it will be much more efficient to use your (edit and your wife's salaries) as SIPP contributions for yourself as you will save on higher rate PAYE as well as NI through whichever scheme your employer runs, that's leaving aside any contributions they also make.

If you really want to avoid your employer's scheme and will forgo their contributions (would have to be a pretty bad scheme to do this as you can always transfer the pension later). You'll still be better off contributing from post tax salary and getting the contribs grossed up.

The money in your co is tax paid (unless your company year has not been reached since you took on the employment with another firm) and so you aren't getting the same benefit if you move it into a SIPP.

There are many things you could invest the co money in the meantime but it could then make the company appear as a closed investment co and you may lose the opportunity to MVL and pay only an additional 10% on the capital utilising entrepreneur's relief (before, perhaps, that benefit is taken away by a chancellor looking for opportunities to gain tax revenue).

I understand that you want to retain the option to return to consultancy and if you did apply for and get EP, that would mean you should not return to that way of working for 2 years. I'd suggest (and I did something similar myself) 2 years in employment may not be too long to wait to secure that tax relief and have circa £450k in your hands and available for immediate investment/used as surrogate salary as your taxable salary goes to fund your pension.

No advice intended] :) Hope this is some food for thought.


EDIT2 Don't forget carry forward: if you have any years in the preceding 4 where you have paid less than £40k to a pension you can carry the shortfall forward and increase your contributions in this year, potentially to the point where you pay 100% of your salary above the tax free allowance into the SIPP in the current year, even subsequent years and pay £0 in PAYE/NI.

https://www.hl.co.uk/pensions/contribut ... calculator
Last edited by BigTim on October 19th, 2020, 12:01 pm, edited 2 times in total.

appleyard
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Re: Investing my company cash in low interest world

#348915

Postby appleyard » October 19th, 2020, 11:58 am

mc2fool wrote:
appleyard wrote:I have a semi-dormant company (I am a consultant hence my own company, but have returned to paid employment with another company), which over a decade has accumulated around 500K cash on the balance sheet. I can't liquidate the company as I may return to be a consultant, nor can I overpay on dividends as it would attract a substantial tax bill. So the plan is to earmark the cash for the SIPP pensions of me and my wife (who both co-own the business) - hence each year the company would pay maximum pension contributions of 40K each, which is a very tax-efficient way of withdrawing cash from the business.

You probably know this already, but just in case not ... the £40K maximum pension contribution each year (that you can get tax relief on) is across all sources and into all schemes, so if you and/or your employer from your paid employment is contributing to a pension then you need to subtract that.


Yes the £40K max pension contribution is a good spot, I've taken a cash alternative on the pension.

BigTim
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Re: Investing my company cash in low interest world

#348928

Postby BigTim » October 19th, 2020, 12:24 pm

If you've taken salary increase from employer in lieu of pension and now want to put tax paid money into a pension... That would seem to be a strategy to avoid getting pension tax relief and actually maximising the tax you pay.

Not saying that your beneficence isn't laudable or appreciated but you may want to look at the figures again if this was not your intent.

UncleEbenezer
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Re: Investing my company cash in low interest world

#348932

Postby UncleEbenezer » October 19th, 2020, 12:45 pm

BigTim wrote:If you've taken salary increase from employer in lieu of pension and now want to put tax paid money into a pension... That would seem to be a strategy to avoid getting pension tax relief and actually maximising the tax you pay.

Not saying that your beneficence isn't laudable or appreciated but you may want to look at the figures again if this was not your intent.


That's precisely what he's not thinking of doing. This is tax-not-paid money (except presumably cooperation tax) which is taxable if taken out as salary or dividends.

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Re: Investing my company cash in low interest world

#348963

Postby Adamski » October 19th, 2020, 3:09 pm

For ETF investments, you could look at VWRL Vanguard All-World and, VUSA Vanguard USA.

appleyard
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Re: Investing my company cash in low interest world

#348965

Postby appleyard » October 19th, 2020, 3:16 pm

UncleEbenezer wrote:
BigTim wrote:If you've taken salary increase from employer in lieu of pension and now want to put tax paid money into a pension... That would seem to be a strategy to avoid getting pension tax relief and actually maximising the tax you pay.

Not saying that your beneficence isn't laudable or appreciated but you may want to look at the figures again if this was not your intent.


That's precisely what he's not thinking of doing. This is tax-not-paid money (except presumably cooperation tax) which is taxable if taken out as salary or dividends.


Many thanks for comments and advice. As always these things are slightly more complex in reality - and difficult to explain. The main problem is I'm 6 months into an employed 2 fixed year contract - hence I need the option to return to my consulting business - hence liquidating my business and utilising entrepreneurs relief really isn't an option. Also my current employer salary is fairly substantial (I appreciate this is a first world problem - but my work is extremely up and down, can work for 3 years very well paid , then not find work 2 years etc) - therefore in reality my annual allowable pension allowance is not £40K but £4K. See....AJBYI_Guide_to_annual_allowance_tapering.This means for the next 18 months I can only make a pension contribution of 4K and 40K for me and my wife respectively. So there is absoultely no point taking a pension from an employer - because the tax kills it, hence why I take a cash option. Hence the need to try and invest the cash each year (to get more than 0.5%) - then liquidating the investment returning the cash back into the business each year, to demonstrate the company loan has been paid back. I was thinking a safe global tracker like SWDA or VWRL?

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Re: Investing my company cash in low interest world

#349018

Postby PinkDalek » October 19th, 2020, 6:59 pm

appleyard wrote:... so the plan is for each year to make a director loan to me and my wife - and invest the cash in a global tracker (single or selection), and sell the holding at the end of each year to return the cash to the business for tax purposes (similar to bed and breakfast - which would also realize any capital gains or losses).... Hence the need to try and invest the cash each year (to get more than 0.5%) - then liquidating the investment returning the cash back into the business each year, to demonstrate the company loan has been paid back. ...


You may already be aware of the following but I thought I should mention it in passing.

FA13/SCH30 also made major changes to CTA10/PART10. In particular: ... the abuse of the repayment relief rules, commonly known as bed and breakfasting is countered by CTA10/S464C.

From https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm61505

I haven't delved further into the HMRC manual as this isn't the Taxes board and most likely beyond my pay scale.

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Re: Investing my company cash in low interest world

#349260

Postby BigTim » October 20th, 2020, 5:21 pm

appleyard wrote:
Many thanks for comments and advice. As always these things are slightly more complex in reality - and difficult to explain. The main problem is I'm 6 months into an employed 2 fixed year contract - hence I need the option to return to my consulting business - hence liquidating my business and utilising entrepreneurs relief really isn't an option. Also my current employer salary is fairly substantial (I appreciate this is a first world problem - but my work is extremely up and down, can work for 3 years very well paid , then not find work 2 years etc) - therefore in reality my annual allowable pension allowance is not £40K but £4K. See....AJBYI_Guide_to_annual_allowance_tapering.This means for the next 18 months I can only make a pension contribution of 4K and 40K for me and my wife respectively. So there is absoultely no point taking a pension from an employer - because the tax kills it, hence why I take a cash option. Hence the need to try and invest the cash each year (to get more than 0.5%) - then liquidating the investment returning the cash back into the business each year, to demonstrate the company loan has been paid back. I was thinking a safe global tracker like SWDA or VWRL?


Ahh more to the story. Though you do know that personal pension contribs would reduce your taxable income and that if you have unused contributions from a previous year you can carry them forward right? Using both those techniques you may still be able to contribute during this and next year and avoid the dreaded taper.

examples: https://www.retirement-planner.co.uk/12 ... -explained

If your wife is employed by someone other than yourco (you mentioned she is a higher rate tax payer). She is still going to be better off having her salary paid into a pension or even paying her pension directly after taking salary or a divdend and reclaiming the tax than the contrib being made from tax paid capital in the limited co (one caveat, if the co tax year is still open and there are profits in this year then contributing to a pension up to that amount would reduce the corp tax bill and so could be worthwhile as an adjunct to your wife's employer contribs which could reduce her income liable to higher rate tax).

Per the previous comment: you need to be very careful with regularly taking and repaying directors loans. They should be subject to a proper interest rate and they could be seen as abusing the co money - treating it as your own.

As for what to do with those ltd co funds.. Well, in the words of Andy Dufrene in The Shawshank Redemption: "do you trust your wife?" because you can, of course, transfer your shares to her and she liquidate the co. Only those shares she has held for >2 years would be eligible for EP but the others would constitute a capital gain (when the co liquidated) and so, after her allowance, that proportion of cash would be subject to 20% tax.

You would, of course, be free to create a new consultancy company to begin trading when your current employment ends. Of course, I am discounting any goodwill you may have in your ltd co - perhaps the name of the co is known rather than it being your name and the co simply vehicle for your services.

Again, I'd understand if you prefer to keep the ltd co and the moneybox it has as is to pay out in future lean times but you will be limited in what you can do with that cash if you want to keep the door open for EP in future. If you care not a jot about future EP you might have the co invest in property, other businesses etc, being wary of it being classed a Close investment Co.

In terms of investing cash liberated from the co via any means, well that is the art isn't it? ;)

Only govt bonds/cash will be "risk free" and then you still have currency risk so if you truly want "safe" then it would be ETFs in a govt bonds across a spread of "safe"| reserve currencies: USD, GBP, Euro, Swiss franc? VWRL would have been a great place to put your money in March (we now know). No-one knows if it will be a great place to put it right now (could be).

As per, no advice intended but hopefully some things to think about.

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Re: Investing my company cash in low interest world

#349268

Postby BigTim » October 20th, 2020, 5:42 pm

UncleEbenezer wrote:
BigTim wrote:If you've taken salary increase from employer in lieu of pension and now want to put tax paid money into a pension... That would seem to be a strategy to avoid getting pension tax relief and actually maximising the tax you pay.

Not saying that your beneficence isn't laudable or appreciated but you may want to look at the figures again if this was not your intent.


That's precisely what he's not thinking of doing. This is tax-not-paid money (except presumably cooperation tax) which is taxable if taken out as salary or dividends.


Sorry, corporation tax is the tax I meant had been paid. "which over a decade has accumulated around 500K cash on the balance sheet"
If it's accumulated over that time, the vast majority of it is likely corporation tax paid by now. I should have said "accumulated profits after tax" :oops:

Of course it's best to make pension contribs within the year the money was made by the ltd co, the pension contribs are a cost and reduce the corp tax bill. Making them out of profits after tax will (if no other income for the limited co in he co year) result in a loss. This could be carried forward against future corp tax but that will be useless unless the OP is sure he will begin trading again.

If the co year in which at least £40k of profits have been made is still open and his wife's income derives from the ltd co, then, yes, making a £40k pension contrib from the ltd co to her pension makes good sense. If, however, she is a higher rate tax payer from another employment she'd be better off deferring as much as she can of that income by having it contributed to a pension or receiving it as salary and then paying it into the pension and obtaining relief. (saving 40% tax on the contribs vs 19% corp tax)

If nothing else, I think this demonstrates that some example scenarios being pencilled down and gone through with the accountant might be good idea :)

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Re: Investing my company cash in low interest world

#349271

Postby scrumpyjack » October 20th, 2020, 5:53 pm

Maybe you could do a share buyback? May not be economic for these sums.

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Re: Investing my company cash in low interest world

#351757

Postby Smoggy » October 29th, 2020, 4:32 pm

Have you considered taking some of the excess as dividends then using that to invest in VCT/(S)EIS to offset the dividend tax liability.


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