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Point of View

Investing your company money

By Paul Harsum APFS, Chartered Financial Adviser
 

With interest rates so low and inflation on the increase, anyone holding large amounts of money in a bank account are effectively losing money.
 
Any successful business – large or small – is likely to generate cash, and can build up big sums of money in the company bank account. It is perhaps unsurprising that company directors of SMEs, and many self-employed contractors, are increasingly looking for ways to invest the earnings they have yet to distribute, while retaining access to them. This is especially true since interest rates for business accounts are even lower than for personal accounts.

The benefits of investing company money, rather than distributing it

If a business is doing well, the directors might hold back surplus earnings to avoid paying unnecessary personal tax. The difficulty is that, in today’s low return environment, this strategy manifests a different kind of business risk: the company is destined to lose money if retained earnings can’t outpace inflation.

First and foremost, then, an obvious benefit of investing surplus money is that it can earn a decent return, preventing it from diminishing in value.

In addition, there are tax advantages:

  • Businesses don’t pay tax on any dividends earned through investment in another UK company
  • Any capital gains will normally only be taxable if they are greater than the rate of inflation
  • Corporation tax rates are lower than individual tax rates

Our approach

Every one of our business clients is different, and will therefore need a bespoke solution. But here is a broad overview of how we approach it:

  1. The float

This is for working capital purposes. This is not invested, it stays as cash to be used as the business needs.

  1. Shorter-term assets

These act as a bridge between the float and any higher yield investments. We would agree an appropriate amount to be held in liquid, low risk investments, such as short-dated bonds, or individual gilts. While expected returns are low, they will still be better than leaving the funds dis-invested, but the money remains accessible.

  1. Medium-term growth portfolio

We then invest a proportion of the money in a mid-tiered investment, such as a bond or gilt fund, longer-dated gilts, or perhaps an infrastructure fund or structured product. This strategy offers a better return than the float, but the money is less liquid, so the business needs to be reasonably sure it won’t need the funds in the short to medium term.

  1. Long-term growth portfolio

Finally, we invest a proportion of the money for longer-term returns. This could be in individual stocks, managed funds, or even commercial property. The money held in these investments will be difficult to access, so we would need to be sure that it’s surplus to the requirements of the day-to-day running of the business.

Many of our clients are typically only targeting a total return of 5% across this three-tiered approach. This ensures we achieve a return in excess of what’s on offer from a business current account, but without taking unnecessary risk with company money.

Considerations

Before making any investment, you should consider what would happen if the investment didn’t work out as planned. One benefit of hiring a professional to invest on your behalf is they will keep a close eye on performance, while you are busy running the company.

It’s also important that any investment decisions are made in conjunction with the company’s tax advisers, especially if investing in commercial property.

A case study

Abbie set up a successful consultancy business over 10 years ago, achieving an average annual profit of £150,000. She took an average of £50,000 a year in salary and dividends, leaving the rest invested. Over the years she has invested her remaining earnings within a company portfolio, building around £1.5 million in the firm. At 54 years old, she has decided to retire.

The funds in the company are now ample to draw-down £50,000 per year as a minimum. This money being the proceeds of her company portfolio. The rest of the fund remains invested for the longer term, and she continues to pay corporate tax rates, which are lower than income tax rates payable on a regular pension income, with distributions subject to PAYE and dividends in the normal way.

We recommend that you always seek advice from a professional financial adviser about investing your company earnings, if you would like to get in touch with one of our advisers you can contact us here

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.