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Tax Discussion Group: a Limited Company’s investment portfolio

The issue of how to process the Tax Return of a Limited Company which had invested in a portfolio of securities formed the basis of an in-depth discussion for a local group of accountants, Andrew McKenzie-Smart reports.

June 2020

The accountant explained that she had not dealt with such investments owned by a Limited Company before and she had the Company’s Corporation Tax Return to deal with. 

She had drawn up the Corporation Tax computation on an investment company basis, but she was unsure how some of the income would be taxed in a Limited Company. 

The investment income appeared to be a combination of UK and foreign Unit Trust distributions. Some of these monies were listed as being dividends, some as interest distributions, with a remainder of the investments not paying any cash distributions at all.

The discussion moved from the compliance issues on to the merits of an investment company. It was thought that the incorporation of an investment portfolio would have the following advantages:

  • The retained income in the Company itself would be taxed at most at a rate of 19% rather than potentially at a marginal dividend tax rate of 32.5% or 37.5%. However this assumed that the majority of the income received was not wanted by the Company shareholders themselves in cash to spend. 
  • There could be some Inheritance Tax advantages from the settlement of the investment company’s shares into Trust rather than if the share portfolio had been held personally. Whilst the Company shares would be included in the estate, the shares they held could be settled into trust, with their growth being outside of the estate. This would given their beneficiaries a fractional interest in the entire portfolio.
  • The Company could also pay salaries to the Directors as part of their retirement planning.

However there were also some disadvantages to these arrangements:

  • Any chargeable gains would not benefit from the annual CGT exemption
  • The Company would have such gains and so the cash distribution would then be taxed at a dividend rate after any Corporation Tax on the chargeable gain.
  • There are additional compliance fees for the operation of the Limited Company. 

Turning to the Corporation Tax compliance the discussion on this reached the conclusion that the securities listed as a capital disposals, REIT and interest distributions should be taxable in the Corporation Tax computation, but that the dividends listed would not be taxed. 

The Company would then be able to deduct their management expenses from this income.

Each month (with the exception of July & 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 & normally cover over a dozen tax issues raised by those attending. During the lock down period these meetings have moved online.

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