The Tax Implications of Investing through a company
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In the world of venture capital and private equity, making informed decisions about investment structures is paramount. One of these important decisions is whether you should invest as an individual or make investments through a structured entity, such as a limited company or a trust. This article provides an overview to the benefits and potential tax advantages of investing through an entity, so you can make the appropriate decision based on your situation.
Unlike individuals, companies don’t receive an annual tax-free allowance, leading to taxation on the entire gain. Considering the individual annual tax-free allowance can be beneficial when determining the best investment strategy. Investing through a limited company might not be as tax-efficient for smaller gains when compared to an individual’s tax-free allowance. For example, if an individual has gains just below £6,000, they pay no tax, but a company would be liable for corporation tax on the entire amount. For larger gains, a limited company might be more advantageous, especially if the company falls under the 19% corporation tax bracket. However, for very large gains, the difference between the higher individual CGT rate (20%) and the main corporation tax rate (25%) becomes relevant. For individuals or entities with substantial investments, it might be worth considering setting up a separate investment company to avail of the 19% tax rate if the taxable profits are £50,000 or less, however the exact function or management of this company should be administered by financial advisors working with the investor.
The primary advantages of these schemes include up to 30% relief on income tax, a typical exemption from capital gains tax, relief on losses should the investment’s value decline, and the option to apply benefits to the previous tax year for tax planning purposes. While there are additional incentives within these programs, it’s essential to understand that these tax benefits are exclusive to individual investors.
Both SEIS and EIS come with specific conditions, like a minimum holding period for the investments to qualify for the benefits. Investors should be aware of these conditions to ensure they meet the criteria and can claim the benefits. There are also limits to how much an individual can invest under these schemes each year and still claim the benefits. Therefore, your decision whether to invest as an individual in a SEIS/EIS eligible company or as an entity will need to consider these factors.
In summary, if your investment is expected to yield dividend income that you won’t require for personal use immediately, investing through a company might be more suitable. However, if you anticipate a smaller dividend income and a larger appreciation in the investment’s value, personal investment might be preferable, especially to leverage the annual capital gains tax-free allowance. The presence of EIS or SEIS benefits could further incline the decision towards personal investment.
Investing, whether as an individual or through an entity, comes with its share of advantages and tax implications. The choice often hinges on specific financial goals, anticipated investment income, and the potential for capital gains.
However, if after those discussions you believe that investing via an entity such as a limited company or a trust is the right choice for you: Cur8 Capital has the platform to allow you to pursue your entity investing goals.
