Update: Advantages of using Personal Investment Companies
A little while ago, I wrote about the advantages of using Personal Investment Companies and I am pleased to say that this has generated a lot of interest. I believe that one of the main reasons is due to the fact that company owners are often reluctant to draw all of the profits out of their company and pay higher rates of tax. Some owners wish to keep within the basic rate tax band and pay no higher rate tax, others do not wish their incomes to exceed £100,00 and lose their personal allowances. For those with incomes over £150,000, not only have they seen their personal allowance disappear in full but they are also faced with a 45% tax rate. Therefore, if your company is making more profit than you wish to draw, what can you do?
One obvious answer is to make pension contributions and following the recent changes in the pension rules, this has become far more attractive. However, recent changes have also included significant reductions in the lifetime limits and for the prudent saver, the new lifetime limit of £1.25m is readily achievable. Beyond that, no further contributions are allowed.
Therefore, if pensions are not the answer and the higher tax rates are unpalatable, why not leave the money in the company and treat it as your personal retirement fund? Long after you have stopped working and have perhaps sold the business, the company can continue to invest in a wide range of assets and provide you with a retirement income. Unlike pension funds, there is no restriction in the type of asset in which the company can invest so residential property is allowed. Subject to having sufficient liquidity, the reserves, which have been built up over many years, can then be drawn out by way of dividend – and if the owner is not a higher rate taxpayer, no tax is payable personally.
Finally, a word of caution. Business Property Relief for Inheritance Tax and Entrepreneurs’ Relief for Capital Gains Tax are valuable tax breaks that apply to the shares of trading businesses but those reliefs can be reduced or lost if the nature of the company’s activities changes from trading to investment so the availability of these reliefs must be considered as part of the overall tax planning arrangements.
If you would like to discuss any of the above points in more detail, please contact Paul Feist.
Written by Paul Feist, Director