When is it best to use Personal Investment Companies?
I think there are a number of reasons why using a personal investment company makes sense.
A personal investment company (PIC) is a private limited company which is used as a long term investment vehicle. There are a number of advantages in using a PIC which include the following:
- The PIC can retain profits for investment rather than those profits being drawn out and being subject to higher rates of personal tax in the hands of the shareholders.
- The PIC can invest in a range of investments including cash, shares, investment funds and property.
- The headline rate of tax for a company is 20% and dividend income is generally tax free. Capital gains tax is also payable at 20% after taking into account the effects of inflation plus the costs of managing the investments can be deducted for tax purposes.
- The profits which are generated on the investments can, within limits, be paid into a pension fund which would attract tax relief for the company.
- The profits which are made by the trading company can be lent to the PIC for investment purposes. This means that the investment company can be used to fund retirement and the trading company can concentrate on its trading activities.
- An individual can lend a sum of money to the PIC for investment and if at any time, the individual requires some of the money, it can be paid back tax free to that person. However, the intention would be for the PIC to invest for the long term and once the individual has reached retirement, then the PIC can make dividend distributions which are free of tax for a basic rate taxpayer. Any money which has been lent to the PIC can be withdrawn tax free.
- Children’s University costs can be funded from a PIC via shares which are owned by the adult child. They would receive dividends on their shares which are free of tax and would avoid the situation where a parent is paying for these costs out of their income, which would otherwise be subject to tax at higher rates.
- There are Inheritance tax planning opportunities by allowing investment growth to fall outside of an estate, thereby resulting in a 40% tax saving.
There are many factors to consider when deciding whether a PIC is appropriate for your circumstances and meets legislative requirements but the savings can be considerable and it is essential that you take advice before taking action.
If you would like to discuss any of the above points in more detail, please contact Paul Feist