Updated 22 March 2022
Corporate investing is a way to put your business’s surplus cash to good use. Instead of just holding all your cash in the bank, you can put some of it into investments to (hopefully) generate additional revenue. Sometimes this can even help you reduce your tax obligations. Here’s your introduction to corporate investing.
Corporate investing simply investing the profits / surplus cash of your business, instead of drawing it as income or holding it in cash bank accounts. It’s also a way to withdraw additional money from a company in a tax-efficient way, when it is not intended to be used as income.
Although a business owner can choose to pay themselves in dividends or through a salary, taking too much out of the business to simply sit in your bank account can result in a hefty tax bill. Conversely, allowing profits to mount up in your business account means this money isn’t actively working for you or the company.
Withdrawing money to place into carefully considered investments can be a savvy decision. Sometimes, re-investing cash into your business or distributing it among shareholders won’t be appropriate, making corporate investments an attractive option.
In recent years, corporation tax, which applies to all profits a business makes and returns on any investments, has plummeted from 28% in 2010/11 to just 19% in 2020/21 (though it is scheduled to rise to 25% in 2023 for all but the smallest companies). This decrease has meant that investing profits is now more attractive to companies. Rather than having to choose tax-efficient vehicles like pensions for their excess profits, business owners are now free to invest in lots of ways without incurring large tax bills.
Some of the other plus points include:
As with all investments, there’s a chance you could lose money – even all of it, though this is an extreme scenario. Even if you choose to invest in a cautious manner and opt for historically stable securities or assets, you could still lose money if the investment market crashes, or simply fail to achieve the returns of cash. Therefore, make sure you’ve clearly worked out your appetite for risk before choosing corporate investing. Running a company is of course inherently risky, so most successful CEOs tend to have a healthy understanding and tolerance of risk.
Corporate investing may not be suitable if you need instant access to your cash to bolster cash flow. You may operate a business that’s seasonal or that doesn’t yet have a steady, consistent stream of clients, meaning tying your money up just isn’t practical. It’s also not ideal if you’re planning to make significant investments in your business in the near future, for the same reason.
If access to cash is an issue for you, ensure that you retain sufficient funds in easy access accounts before investing any surplus that remains. It may also be wise not to lock away investments for too long, if you’re worried about cash flow.
The best investment vehicle will look different depending on a number of factors, including:
Here are just some of the most popular options:
Depending on the size of your business, your corporate tax obligations will look very different. For example, micro-entities (defined as a business with a turnover of less than £632,000, 10 or fewer employees and/or a balance sheet total of up to £316,00) will only have to pay tax on investments once they’re ‘realised’ – surrendered at least in part or sold on.
Small companies, meanwhile, will be taxed on any ‘basic financial instrument’ (such as stocks, shares, bonds or options and futures contracts) investments once they’re realised. However, other investments, for example any commodities such as gold or oil, will need to be declared on your annual tax return.
You’ll also need to consider whether investments will push you over the capital gains tax threshold, which is £12,300 for the 20/21 tax year. And if you’re thinking about estate planning when making corporate investments, you’ll need to consider if you qualify for business property relief, which will allow business-related assets to be passed down tax-free after two years.
As you may have gathered from the previous paragraph, corporate investing in a way that minimises excessive tax can be a little complex. To make sure you maximise the tax-efficiency of your investments and get to hold onto as much of your liquid profits as possible, it’s best to speak to an accountant first. They can help you work out exactly how much tax you’ll be looking at paying on your revenue and profits.
If you’re not familiar with the world of investments, it’s a smart idea to seek guidance before taking the plunge. An independent financial adviser can help you gauge your appetite for risk, or how willing you are to lose any money you invest, and how long you’re happy to tie your money up for, before offering impartial advice.
A financial adviser who specialises in adviser business owners can get you started with corporate investments. Your accountant may also be able to help.