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Tax Efficient Funding for Share Investments

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You have been invited to purchase a minority stake in a new business venture. This presents an exciting opportunity, but before committing funds, you want to consider the most tax-efficient approach. Should you use personal funds or invest through your company? The tax implications differ depending on which route you take. Let’s explore both options.

Personal Investment

If you purchase the shares personally, any dividends received will be taxed in the year you receive them. Dividends are taxed at 8.75%, 33.75% and 39.35% for basic, higher and additional rate taxpayers, respectively.

You will also pay tax when you eventually sell the shares. Capital gains tax (CGT) applies to any profits made. CGT rates are 10% for basic rate taxpayers and 20% for higher rate taxpayers. One advantage of personal investment is that you benefit from an annual CGT exemption, allowing you to make tax-free gains each year. However, this exemption was substantially reduced in April 2023 and will fall further to £3,000 in April 2024. So, the tax saving is now quite small.

In summary, while straightforward, tax on personal investments is inflexible. You pay tax on dividends and gains as they arise each year.

Investing Through a Company

If your company purchases the shares, any dividends received are usually tax-free. This can defer tax liabilities. However, since April 2023, dividends may sometimes indirectly increase your corporation tax bill.

Like personal ownership, your company will pay corporation tax (19% or 25%) when it sells the shares at a profit. Companies do not receive an annual CGT exemption.

However, if your company owns at least 10% of the shares in the investee company, gains on disposal can qualify for the substantial shareholding exemption. This exempts gains from corporation tax if the shares have been held for at least one year.

Personal vs Company Funding

At first glance, investing through your company is the most tax-efficient option. But there is an important consideration – eventually, you will take money out of the company, which will be taxable.

If you withdraw profits as dividends, you will pay the same tax rates you would have paid had you owned the shares personally. What’s more, any growth in share value is taxed both within the company and again personally when money is withdrawn. This can lead to higher overall tax bills.

However, this double taxation can be avoided if you don’t need income from the investment in the short-term and ultimately wind up your company when you sell the shares. The key is aligning the timing of withdrawals with your broader plans.

Key Takeaways

  • Personal investments lead to taxation when income and gains arise each year.
  • Investing through a company can defer tax and lead to double taxation.
  • Double taxation can be prevented by retaining profits within the company until shares are sold.
  • The substantial shareholding exemption prevents double tax on gains when disposing of shares held for over one year.
  • Company investment is usually most tax-efficient if the substantial shareholding exemption applies and withdrawals are aligned with your circumstances.

While company investment has pitfalls, if managed strategically, it will likely prove the more tax-efficient approach for your minority share acquisition. Take time to consider the tax implications so you can fund the investment most taxably.

Disclaimer

Our blogs and articles are for information only. If you need help with your specific tax problem or need advice for your business please call us on 0800 135 7323