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£400k cash conundrum

A recent Tax Discussion Group discussed a company that had £400,000 of surplus cash and the options that the company had about how to invest the monies.

July 2018

The client had approximately £500,000 in distributable reserves, £400,000 of which was actually in cash. The company had built these reserves from undistributed profits over a couple of years, does not have any need to use these monies to acquire future assets and expects to continue to make significant profits for the foreseeable future.

The company’s director/shareholder was considering investing the monies in his own name temporarily and wondered whether he would be able to claim he was acting as nominee for his company to get an investment return.

The TDG discussed the s455 CTA 2010 charge that would arise on the withdrawal of these monies from the company. We also considered the following:

  1. Whether the company itself should consider investing the monies into a share portfolio in order to get an investment return.
  2. The company’s status for Entrepreneurs Relief, as the surplus cash balances or investment portfolio would affect the company’s trading status.
  3. Whether the company would have scope to make significant pension contributions to reduce the cash sums held by the company. This would benefit from corporation tax relief as well as providing tax exempt investment income and gains for use when the directors retired.
  4. Whether the shareholders should extract the monies as dividends and utilise tax efficient investments such as EIS and SEIS shares if they were not in need of the funds drawn.

A full analysis of these tax issues is beyond the scope of this article but should be considered by anyone who has similar issues to consider. The most suitable solution for the client will be dependent on their circumstances, such as the length of time before they would seek to dispose of the company, their attitude to investment risk as well as their future financial needs.

Each month (with the exception of July and August) the Tax Discussion Groups in Croydon & South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend and normally cover over a dozen tax issues raised by those attending.

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