Techcellence: Direct investments and companies

For micro entities (where 2 out of 3 of the following apply; turnover less than or equal to £632k, balance sheet less than or equal to £326k and 10 or fewer employees) the historic cost basis of tax can apply, meaning that the loan relationship legislation does not cause gains to apply on a company year basis where assets are not realized. From the table above, this applies to UK and offshore bonds and debt / debt-based collectives for companies that are subject to fair value accounting.

Significant efficiency comes from the holding of equites, where a high proportion of total return can typically come from dividends which are franked income, which is not taxable in the receiving company’s hands.  Capital gains are taxable to corporation tax when realized. For equity-based collectives, the same is true, to the extent that the dividends within the fund are themselves franked.  For equity funds holding company shares from more than one country, ascertaining the franked component, known as ‘streaming’, may require a breakdown of dividends from the fund manager.

The tax position for companies holding rental properties is worthy of comment.  Courtesy of s.24 FA 2015 many private landlords have turned to company structures for their rental portfolios. This is because since 2017 landlords have not been able to deduct all of their finance costs from their property income to arrive at their property profits, and instead receive a basic-rate reduction from their income tax liability for their finance costs. A full deductibility remains available where rental properties are part of a corporate entity. However, unlike franked dividends, rental income is subject to corporation tax within the company.  Of course, for trading companies, Family Investment Companies (FICs) and property companies alike, extraction of value will ultimately be subject to tax, most conventionally by dividends or salary and pension contributions where appropriate.

Finally, it should be noted that retaining excess investments may change the nature of a trading company, potentially impacting the availability of business relief, such as Inheritance Tax (IHT) and business asset disposal relief, which is subject to Capital Gains Tax (CGT).  Of course, companies set up for the specific purpose of investment will not have these possible reliefs to use.

This material is not tax, legal or accounting advice and should not be relied on for tax, legal or accounting purposes. Quilter Cheviot Limited does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting adviser(s) before engaging in any transaction.

This material is based on Quilter Cheviot’s interpretation of the law and tax practice as at April 2022. While this interpretation is believed to be correct, Quilter Cheviot can give no guarantee in this respect or that tax reliefs and the tax treatment of investment funds will remain the same in the future. The value of any tax reliefs will depend on individual financial circumstances.