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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.
At Cur8 Capital we offer the ability to invest via entities of all kinds, including limited companies, trusts, charities, and CIOs, or to register other types of entities. If you believe investing via an entity is the right choice for you, you can begin your entity investment journey here or you can add an entity to an existing Cur8 account in the account details tab of our platform.
Should I be investing via a Limited Company?
When deciding whether to invest individually or through an entity there is no one-size-fits-all answer. The key factor that should influence your decision is your tax needs as well as where your money is sat right now. Investments deliver income from value increases and dividends, which are taxed in different ways for individuals and entities.
When investing as an individual, dividends received are subject to dividend tax rates. For the tax year 2023/24, the tax rate varies based on which tax bracket the dividend income belongs to: Basic rate – 8.75%, Higher rate – 33.75%, Additional rate – 39.35%.
When investing through a Limited Company, dividends are often not subject to Corporation tax (as they are treated as having been already taxed at the entity you invested into), meaning your own entity won’t pay tax on that dividend income. However, to access that profit, one would have to declare a dividend and then pay personal tax on it according to the aforementioned rates.
If the profit remains within the entity, there’s no immediate tax liability. This retained profit can be reinvested into other investments or support various company operations. It’s essential to maintain a balance between investment activities and other business operations to ensure the company’s correct classification as a Ltd company and not an investment company.
Capital Gains for Ltd Company Entitles
When investments are realised or sold, individuals are subject to capital gains tax (CGT) on the applicable gains. The CGT rate also varies based on the type of investment and the individual’s tax bracket. You pay the tax on the profit you make when selling the item, not the total value of the item sold.
An annual tax-free allowance of just £6,000 is available for the tax year 2023/24 and will be cut to £3,000 in April 2024. This means gains on investment up to this amount are not taxed. Beyond this threshold, basic rate taxpayers pay 10% on non-property related investment gains, while higher rate taxpayers face a 20% rate.
Do limited companies pay capital gains tax? The short answer is no, limited companies don’t pay capital gains tax. Rather they pay corporation tax on any profits made from, trading profits, investments, and chargeable gains (selling assets).
Companies are liable for Corporation tax on investment gains upon sale. The current Corporation tax rate is 25%, with anticipated increases in the coming years. However, only companies with taxable profits over £250,000 will pay the main rate of 25%. Those with a taxable profit of £50,000 or less will remain on the 19% rate (referred to as the small profit rate). Therefore, depending on the entity’s value the tax rate will be between 19-25%.
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.
You should check if the investment of interest is SEIS or EIS qualified. These HMRC-supported programs aim to promote investments in emerging start-ups by offering incentives to reduce investment risks. SEIS and EIS provide investors with several tax benefits, and 70% of Cur8’s start-ups are SEIS/EIS eligible, so this is worth checking.
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.
What about Trusts?
Investing through a trust in the UK presents a distinct set of tax implications, particularly when compared to individual or corporate investing. It is advisable to consult with a UK tax advisor or solicitor when setting up a trust for investment purposes or managing trust investments. This is a general overview, and the specifics can vary based on the details of the trust, the investments, and any changes in UK tax law.
Income Tax: Trusts are subject to Income Tax on income they receive. This includes dividends, rental income, and interest. The rate of tax depends on the type of trust. For example, in the case of “interest in possession” trusts, the rates are: 8.5% on dividend income, and 20% on all other income. For “discretionary” or “accumulation” trusts, the rates are 39.35% on dividend income (after the dividend allowance is used up) and 45% on all other income (after the standard rate band is used up, which is taxed at 20%)
Capital Gains Tax (CGT): When the trust disposes of assets, such as shares in a venture capital firm or real estate, it might incur a capital gain. Trusts have a special Capital Gains Tax allowance, which is typically half the allowance given to individuals. The rate of CGT for trusts is higher than the basic rate for individuals but lower than the higher rate. The rate of CGT for trusts currently is £3,000. Trusts are eligible for SEIS/EIS.
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.
For individuals, while there is a tax-free allowance on capital gains, dividends are taxed at varying rates depending on your tax bracket. Investing through a limited company, on the other hand, can offer deferral of personal tax on dividends and a potentially lower tax rate on gains, especially for companies with profits below £50,000. However, the absence of a tax-free allowance for companies may make individual investments more attractive for smaller gains.
SEIS and EIS schemes, primarily aimed at individual investors, offer a range of tax incentives. These schemes can significantly influence the decision-making process, especially when most of the startups, like many of those associated with Cur8 Capital, are eligible.
Trusts present another alternative for investors, providing asset protection, potential tax benefits, and more tailored control over asset distribution. However, the UK’s tax implications for trusts are distinct and can be intricate, necessitating expert consultation.
In the end, there is no universal answer. The optimal investment strategy will be shaped by your financial objectives, anticipated investment outcomes, and personal circumstances. It is crucial to weigh the tax benefits against potential returns and seek expert advice to navigate the complex world of investments and taxation.
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.