How to invest large cash surplus in business?

[jpenn]

Hi

I started my business 18 months ago now after switching from being self-employed to becoming a limited company.

The business required no investment and in the last 18 months I have been very fortunate to be able to accumulate a pretty significant amount of cash in my business.

At the moment, I have around £500k in the business savings account with approx £150k earmarked for tax. Currently that money is earning about £150 a month interest - but surely there are better ways to use that money?

I feel like the level of success my business is enjoying right now could be a short term success so if I could use it to start earning a passive income that would be great - but I'm not sure what options there are.

Any suggestions would be very much appreciated - but bare in mind I'm a complete novice in this area so pleas limit the technical jargon

Thanks,
James

 

[john1989]

With £500k sat in the bank, professional, paid for advice is advised.

 

[UK Contractor Accountant]

Have you thought about investing in Commercial property via a company pension scheme.

There are some excellent tax planning opportunities via a company pension scheme (SSAS or SIP) with the pension contributions reducing your Corportion Tax liabilty.

Will need to speak to an IFA if considering financial investment via a pension scheme.

I am sure your Accountant can recommend an IFA. If not PM me and I can put you in touch with some.

 

[jpenn]

"Have you thought about investing in Commercial property via a company pension scheme."

In a word, no! I've never even heard of this but I will look into it now.

I will be contacting a financial advisor in a few weeks and see what they have to suggest. I'd just like to arm myself with a few ideas so I can do some research myself first and not be baffled when I come to meeting with an IFA.

James

 

[Karimbo]

you shouldn't really be investing money set aside for tax anywhere other than a secure savings account.

The money set aside as profits, reinvest in the business (this could reduce your tax liability). What is your business btw. Accumulating 500K is very good for a startup.

 

[David Griffiths]

Have you thought about investing in Commercial property via a company pension scheme.

There are some excellent tax planning opportunities via a company pension scheme (SSAS or SIP) with the pension contributions reducing your Corportion Tax liabilty.
.

Given the current caps on contributions, and the restricted borrowing powers of a SIPP it usually takes a good few years to get enough in the SIPP to fund any worthwhile property purchase. Still the sooner you start . . .

 

[jpenn]

you shouldn't really be investing money set aside for tax anywhere other than a secure savings account.

The money set aside as profits, reinvest in the business (this could reduce your tax liability). What is your business btw. Accumulating 500K is very good for a startup.

I won't be investing any of the money set aside for tax purposes. There is 500k in the account, my first year corporation tax is about £75,000 and my 2nd year (only 6 months through) will probably be about the same.

All tax money will simply be left in the savings account ready to pay the tax bill when it needs to be.

 

[jpenn]

What is your business btw. Accumulating 500K is very good for a startup.

Essentially, it involves:

- Setting up websites and running advertising on these websites
- Getting as many people to visit the websites as possible

James

 

[UK Contractor Accountant]

Nothing to stop the company buying a commercial property (can be trading premises of the company) and say transfer 50% into a SSAS as a pension contribution within the allowable limits.

The remaining 50% can be transferred at a later date.

 

[Deggle]

I'm in a similar position - more cash than is sensible to extract (unless you love paying tax). Reinvesting in the business is a good bet, but its not always possible. Firstly, fill up your SIPP allowance, and remember you can back-fill the prior 2 years meaning that you can start off your pension with £150k (assuming no contributions so far).

We invested 100k of the company cash in shares, though sold 60k of it a year later as the share dealing company wanted lots of forms filling out with information they already had (didn't have time for it, so sold out and closed account). The other 40k was invested in Fundsmith and is now worth 65k - not bad for 2 years! Of course, there will be tax on realisation of gain.

Finally, you can leave the cash in the business to extract later or support the business (and your remuneration) if the success does turn out to be short term. Of course, you could use the cash to buy or invest in other businesses to seek further growth.

 

[jpenn]

I'm in a similar position - more cash than is sensible to extract (unless you love paying tax). Reinvesting in the business is a good bet, but its not always possible. Firstly, fill up your SIPP allowance, and remember you can back-fill the prior 2 years meaning that you can start off your pension with £150k (assuming no contributions so far).

We invested 100k of the company cash in shares, though sold 60k of it a year later as the share dealing company wanted lots of forms filling out with information they already had (didn't have time for it, so sold out and closed account). The other 40k was invested in Fundsmith and is now worth 65k - not bad for 2 years! Of course, there will be tax on realisation of gain.

Finally, you can leave the cash in the business to extract later or support the business (and your remuneration) if the success does turn out to be short term. Of course, you could use the cash to buy or invest in other businesses to seek further growth.

Thanks for your response.

For me, investing in the business is not necessary. There is little to invest in - apart from advertising spend.

The SIPP allowance (never heard of it before starting this thread) is something I need to look into and get advice on.

65k from 40k in two years sounds great. In the bank my cash would have earned less than £400!

Leaving cash in the business savings account is what I'm currently doing. And the way I see it is, that if business ends tomorrow, I've got £350,000 that I can gradually drip out to myself in wages over the next couple of decades. But if I could use this bit of luck I'm experiencing to set myelf up for life - that would be even better!

 

[LukeIFA]

Hi jpenn,

There are several options using company pensions/SIPP's/SASS's contributions in a tax efficient way to get the most out of your money.

I have had a years of experience in this and works for some people.

There are also different options using personal management companies, trust based investments, bonds etc wouldn't mind having an open conversation with you about it.

I have dropped you a message with my contact details.

Thanks

 

[Vardan 89]

Essentially, it involves:

- Setting up websites and running advertising on these websites
- Getting as many people to visit the websites as possible

James

Is it something to do with affiliate marketing ? If you don't mind can you pls share URLS for few of your sites?

Thank you
Darsh

 

[TheCyclingProgrammer]

Does investing heavily with company funds open you up to the risk of HMRC choosing to tax you as an investment rather than a trading company?

 

[UK Contractor Accountant]

Whats the difference? investment companies are taxed at the main rate of tax which will be the same as the small company rate (20%) from 1 April 15.

There are some restrictions on some tax reliefs (ER & EIS for example) for wholly investment companies.

 

[TheCyclingProgrammer]

It's been common advice on another contracting forum that people should be wary in about having their company seen as a CIC for numerous reasons - the tax rate, being one but as you say as the main rate has converged with the small company rate this is somewhat mitigated - but eligibility for ER I would say is quite a bit one, especially with that much money in the pot.

Just something to think about and worth weighing up the risks of not being eligible to ER but making a return on investment now, vs shutting down the company after a few years, claiming ER on the capital distribution and investing the funds personally

http://www.contractorcalculator.co.uk/tax_contractors_save_money_limited_companies.aspx

 

[UK Contractor Accountant]

Not much he can do about it - he has £500K sat in the bank as an investment????

That will have an impact on ER claim.

 

[TheCyclingProgrammer]

Is simply putting it in a business savings account with what is probably a minute interest rate enough to make it considered a CIC? That's what I'm asking. If he's still trading and not actively managing his funds then is that enough for it to be considered a CIC? Or does there have to be some active management of money and deliberate investment? Where is the line drawn?

 

[UK Contractor Accountant]

Thats the $60m question - seek paid professional advice on whether it does or doesn't.

 

[TheCyclingProgrammer]

Thats the $60m question - seek paid professional advice on whether it does or doesn't.

Alas, I have barely a tenth of what OP has lying around. Nice problem to have, either way.

 

[Deggle]

Not much he can do about it - he has £500K sat in the bank as an investment????

That will have an impact on ER claim.

Cash sat in the bank is not really an investment (in fact, it's probably losing value). As long as the cash is profit from trading it should not have a significant impact on ER eligibility. The way HMRC apply these (vague) rules does seem to be quite reasonable.

 

[jpenn]

How bizarre! I just Googled "best way to invest business cash" (as I'm always looking to see if there's anything new I could do) and arrived at this thread. I was amazed at how similar the OPs situation was to mine, until I realised that it was my post a few years ago!

I thought while I'm here it might be useful to update you on what I've done - although understand that I'm still a novice and now have a financial advisor to guide me.

- Firstly, I've now got a SIPP and fill it with £40k each year

- Secondly, I moved some of the money into different business savings accounts to get better interest - such as 1.88% fixed for a year with Aldermore - but this was a little while ago and the rate is now more like .85%

- Thirdly, I've moved a small amount of funds into Ratesetter for P2P lending which is currently at about 2.9%.

- Fourthly, I invested in some corporate bonds from Downing Crowd. These average out at about 6% fixed for a year and will be maturing over the next couple of months - all being well.

- Finally, and most recently, based on advice from my financial advisor, we have moved a large amount of money into one of the MyFolio funds so I can finally start benefiting from stock market upswings (although of course it could go down!). I believe there is a rule that your investment must be allocated into more than 40% equities.

So that's what I've done but I'm also open to new ideas and suggestions.

Thanks.

 

[pentel]

Not been mentioned yet but please be wary of changing the status of your company from a trading company to an investment company. A trading company qualifies for entrepreneurs relief so 10% tax on sale. An investment company doesn't so would be at a higher rate.

 

[jpenn]

Thanks for mentioning. That didn't crop up between my IFA and accountant so I'll contact them today.

Is there a proportion of cash that needs to be invested to become an investment company? Right now I'm at about one third.

Could you direct me to any articles on this topic?

Thanks.

 

[STDFR33]

Start here:
https://www.gov.uk/entrepreneurs-relief/eligibility

For a company to be classified as a trading company, and not an investment company, it cannot have substantial investment activity S165A(3) TCGA 1992.

HMRC consider 'substantial' to be in excess of 20%.

 

[jpenn]

Thanks.

I suppose RateSetter and Downing Crowd Bonds would be considered investments too, so that would actually take me up to about 40%. I'll talk to my accountant.

 

[STDFR33]

Yes, they will count as investments.

 

[jpenn]

From my research (don't worry, I will still also be contacting my accountant), HMRC apply four tests to see if you qualify for ER.

They apply a 20% test to see whether investment activities are substantial:

- Turnover - Not currently anywhere near 20% from investment

- Asset base - Currently about 40% BUT I'd only be likely to close down my business and apply for ER after I sell my main website - which at current market rate would make my cash in investments more like 15%.

- Expenses - Less than 20%

- Time spent by management and employees - More like 1%

They don't say whether you need to meet one, two, three or all of these tests to be disqualified from ER. I think it's more of a case by case basis using the above as guidelines.