Remove ads

Introducing the LemonFools Personal Finance Calculators

Personal investment companies

Including Financial Independence and Retiring Early (FIRE)
Spet0789
Lemon Slice
Posts: 843
Joined: June 21st, 2017, 12:02 am
Been thanked: 63 times

Personal investment companies

#200299

Postby Spet0789 » February 10th, 2019, 12:25 pm

Has anyone experience with a PIC? Or more broadly holding investments in a limited company?

I aim to FIRE in 2-3 years but will have a ‘tail’ of taxable income for about 5 years after that. The attraction for me of a PIC would be to invest over those years and allow all of the dividend income to roll up and be reinvested inside the PIC. As I understand it that would create no corporation tax liability. Then when my income from employment has ceased I would start to draw out the returns as a basic rate tax payer.

Does this make sense?

PinkDalek
Lemon Quarter
Posts: 3981
Joined: November 4th, 2016, 1:12 pm
Has thanked: 917 times
Been thanked: 1029 times

Re: Personal investment companies

#200306

Postby PinkDalek » February 10th, 2019, 1:12 pm

This looks like a question for Taxes (Practical Issues). Coincidentally, I saw a similar topic yesterday but can't recall where it was!

Spet0789 wrote:... The attraction for me of a PIC would be to invest over those years and allow all of the dividend income to roll up and be reinvested inside the PIC. As I understand it that would create no corporation tax liability. Then when my income from employment has ceased I would start to draw out the returns as a basic rate tax payer. ...


As you suggest, UK companies do not pay Corporation Tax on UK sourced dividends, as far as I am aware.

Corporation Tax ("CT") is a tax on profits, including chargeable gains on the disposal of chargeable assets. Indexation relief for companies was frozen recently so will not be available for new investments.

The current rate of CT is 19% (wef 1 April 2017), reducing to 18% (wef 1 April 2020). The present Government intends to reduce that 18% to 17% (wef 1 April 2020).

The future dividends from the company to you can, presently, be set at whatever rate you so desire. Thus you can time your taxable income to suit, bearing in mind the current "dividend allowance" of £2,000 per annum.

However, when you then break up the company in future years (or you make disposals over the years), the company will be paying to CT on the gains (if any). The net, presumably via a liquidation process at a cost, will come out as chargeable gains (or possibly income if it can be structured correctly), on the shareholder. At whatever rates then apply.

Spet0789
Lemon Slice
Posts: 843
Joined: June 21st, 2017, 12:02 am
Been thanked: 63 times

Re: Personal investment companies

#200318

Postby Spet0789 » February 10th, 2019, 2:23 pm

Thanks. I put the query here as there are other potential implications beyond taxation such as the costs of maintaining the PIC and the practicalities of opening accounts with brokers as a company not an individual.

PinkDalek
Lemon Quarter
Posts: 3981
Joined: November 4th, 2016, 1:12 pm
Has thanked: 917 times
Been thanked: 1029 times

Re: Personal investment companies

#200354

Postby PinkDalek » February 10th, 2019, 5:02 pm

I didn’t spot those questions.

Online Companies House filing fee £13, for what used to be called the annual return.

The accounting, tax etc depends on your capabilities. Many do all that for free themselves. See this topic at Running your Business (which answers some questions):

viewtopic.php?f=45&t=10651

As for brokers, I think, for instance, Hargreaves Lansdown may permit companies. Dare I say it but the Brokers board covers this aspect quite often.

Hariseldon58
Lemon Slice
Posts: 342
Joined: November 4th, 2016, 9:42 pm
Has thanked: 16 times
Been thanked: 148 times

Re: Personal investment companies

#200659

Postby Hariseldon58 » February 11th, 2019, 7:34 pm

My (limited) understanding is that PIC are useful for very high net worth individuals, directors loans etc. are very efficient tax wise.

I’d pay for advice !

hiriskpaul
Lemon Quarter
Posts: 1338
Joined: November 4th, 2016, 1:04 pm
Has thanked: 35 times
Been thanked: 318 times

Re: Personal investment companies

#200954

Postby hiriskpaul » February 12th, 2019, 10:22 pm

Not really a PIC, but several years ago I invested in preference shares within my personal consulting company. Dividends are free of CT and capital gains are at CT rates, with no annual allowance, but indexation allowance inflates away capital gains. At least it did until Hammond put a stop to indexation :( .

I have toyed with the idea of making an interest free loan to my company and investing the proceeds. I could then draw out the dividends from investments tax free as loan repayments. Have never taken this further, but interested to know if others can think of obstacles to prevent this. Company Articles would have to permit the investments of course, but mine are extremely wide. Ultimately though this is building up a future tax headache, especially now indexation allowance has been halted. No entrepreneurs relief for investment companies either.

I use Hargreaves Lansdown for my company account.

Cookie
Lemon Pip
Posts: 75
Joined: January 27th, 2018, 10:19 pm
Has thanked: 33 times
Been thanked: 1 time

Re: Personal investment companies

#201617

Postby Cookie » February 15th, 2019, 5:26 pm

hiriskpaul wrote:Not really a PIC, but several years ago I invested in preference shares within my personal consulting company. Dividends are free of CT and capital gains are at CT rates, with no annual allowance, but indexation allowance inflates away capital gains. At least it did until Hammond put a stop to indexation :( .

I have toyed with the idea of making an interest free loan to my company and investing the proceeds. I could then draw out the dividends from investments tax free as loan repayments. Have never taken this further, but interested to know if others can think of obstacles to prevent this. Company Articles would have to permit the investments of course, but mine are extremely wide. Ultimately though this is building up a future tax headache, especially now indexation allowance has been halted. No entrepreneurs relief for investment companies either.

I use Hargreaves Lansdown for my company account.


H&L dont advertise their trading account online, you have to ring for a form. Interactive Investor is another, but H&L trading account is quite good fees for shares.

You also need an LEI now, Bloomburg is probably the cheapest for this

Would you not need it to be an interest charging loan, otherwise there would be no proceeds and you would just return capital you put in?

I know some do loan their funds to the company if they are going to exceed their personal tax allowances

You run into Director Loans rules doing loan from company to individual, charging HMRC rates of interest helps, but I do feel it is a red flag to HMRC to come and investigate me

Do you invest through your trading company or via a holding company (investment company)? In a holding company structure you can either make a loan from the trading company to the holding company or hold shares which receive dividends from the holding company tax free

The holding company is then separate from the trading company if you were to claim Entrepreneurs Relief on the trading company, so no issues with it being disallowed due to your trading company being considered an investment company

There is obviously a cost to running another company

I have to admit I havent done this, but the premise makes sense

Spet0789
Lemon Slice
Posts: 843
Joined: June 21st, 2017, 12:02 am
Been thanked: 63 times

Re: Personal investment companies

#201806

Postby Spet0789 » February 16th, 2019, 5:21 pm

Thanks all for input.

Certainly something I’ll keep in mind but agree it’s worth taking advice on.

Charlottesquare
Lemon Slice
Posts: 992
Joined: November 4th, 2016, 3:22 pm
Has thanked: 6 times
Been thanked: 102 times

Re: Personal investment companies

#202365

Postby Charlottesquare » February 19th, 2019, 3:29 pm

Cookie wrote:
hiriskpaul wrote:Not really a PIC, but several years ago I invested in preference shares within my personal consulting company. Dividends are free of CT and capital gains are at CT rates, with no annual allowance, but indexation allowance inflates away capital gains. At least it did until Hammond put a stop to indexation :( .

I have toyed with the idea of making an interest free loan to my company and investing the proceeds. I could then draw out the dividends from investments tax free as loan repayments. Have never taken this further, but interested to know if others can think of obstacles to prevent this. Company Articles would have to permit the investments of course, but mine are extremely wide. Ultimately though this is building up a future tax headache, especially now indexation allowance has been halted. No entrepreneurs relief for investment companies either.

I use Hargreaves Lansdown for my company account.


H&L dont advertise their trading account online, you have to ring for a form. Interactive Investor is another, but H&L trading account is quite good fees for shares.

You also need an LEI now, Bloomburg is probably the cheapest for this

Would you not need it to be an interest charging loan, otherwise there would be no proceeds and you would just return capital you put in?

I know some do loan their funds to the company if they are going to exceed their personal tax allowances

You run into Director Loans rules doing loan from company to individual, charging HMRC rates of interest helps, but I do feel it is a red flag to HMRC to come and investigate me

Do you invest through your trading company or via a holding company (investment company)? In a holding company structure you can either make a loan from the trading company to the holding company or hold shares which receive dividends from the holding company tax free

The holding company is then separate from the trading company if you were to claim Entrepreneurs Relief on the trading company, so no issues with it being disallowed due to your trading company being considered an investment company

There is obviously a cost to running another company

I have to admit I havent done this, but the premise makes sense


If you have a holding company holding the shares in the trading company ER will not be on point re selling the trading company shares, ER only applies to individuals and in such a scenario it would be a corporate entity holding the shares in the trading company.

You might get by with associate companies and an inter company loan from trading to investment but that loan may in itself put at risk ER relief re the trading company.

scrumpyjack
Lemon Slice
Posts: 484
Joined: November 4th, 2016, 10:15 am
Has thanked: 19 times
Been thanked: 132 times

Re: Personal investment companies

#202368

Postby scrumpyjack » February 19th, 2019, 3:44 pm

There must be problems or PICs would be more widely used, I would have thought.

eg I presume the PIC would pay tax on capital gains realised in the PIC and you would then pay tax on whatever route you used to extract cash from the PIC - double taxation?

PinkDalek
Lemon Quarter
Posts: 3981
Joined: November 4th, 2016, 1:12 pm
Has thanked: 917 times
Been thanked: 1029 times

Re: Personal investment companies

#202417

Postby PinkDalek » February 19th, 2019, 7:19 pm

scrumpyjack wrote:eg I presume the PIC would pay tax on capital gains realised in the PIC and you would then pay tax on whatever route you used to extract cash from the PIC - double taxation?


I thought I covered much of that in my reply back here viewtopic.php?p=200306#p200306.

syrio
2 Lemon pips
Posts: 116
Joined: April 24th, 2017, 10:21 pm
Has thanked: 27 times
Been thanked: 32 times

Re: Personal investment companies

#205997

Postby syrio » March 6th, 2019, 3:29 pm

Spet0789 wrote:Has anyone experience with a PIC? Or more broadly holding investments in a limited company
Does this make sense?


Yes, I have investments in a limited company, and no, it probably doesn't make much sense for you.

You will pay corporation tax on capital gains realised in the holding company and then dividend tax on dividends you take out of the company. There is cost and admin involved running a limited company. You can't access your money as you could if it was your own.

You don't give any idea of the amounts involved, so really it isn't possible to make any sort of judgement.

Spet0789
Lemon Slice
Posts: 843
Joined: June 21st, 2017, 12:02 am
Been thanked: 63 times

Re: Personal investment companies

#206062

Postby Spet0789 » March 6th, 2019, 9:30 pm

syrio wrote:
Spet0789 wrote:Has anyone experience with a PIC? Or more broadly holding investments in a limited company
Does this make sense?


Yes, I have investments in a limited company, and no, it probably doesn't make much sense for you.

You will pay corporation tax on capital gains realised in the holding company and then dividend tax on dividends you take out of the company. There is cost and admin involved running a limited company. You can't access your money as you could if it was your own.

You don't give any idea of the amounts involved, so really it isn't possible to make any sort of judgement.


500k to 800k.

syrio
2 Lemon pips
Posts: 116
Joined: April 24th, 2017, 10:21 pm
Has thanked: 27 times
Been thanked: 32 times

Re: Personal investment companies

#206254

Postby syrio » March 7th, 2019, 3:22 pm

Well it depends on what your income is during your time up to retirement, and to what extent your investment income makes you pay higher rate tax.

If you had 800k invested in VWRL, you would have about 16k in dividends. I can't see it being worthwhile.

If you had £10M, receiving about 200k in dividend income, perhaps it is worthwhile if you wanted to stay as a basic rate taxpayer. But you wouldn't really be able to benefit from your money as you are limiting your income and can't really spend the money in the company.

Spet0789
Lemon Slice
Posts: 843
Joined: June 21st, 2017, 12:02 am
Been thanked: 63 times

Re: Personal investment companies

#214851

Postby Spet0789 » April 13th, 2019, 2:57 pm

syrio wrote:Well it depends on what your income is during your time up to retirement, and to what extent your investment income makes you pay higher rate tax.

If you had 800k invested in VWRL, you would have about 16k in dividends. I can't see it being worthwhile.

If you had £10M, receiving about 200k in dividend income, perhaps it is worthwhile if you wanted to stay as a basic rate taxpayer. But you wouldn't really be able to benefit from your money as you are limiting your income and can't really spend the money in the company.


From my original post:-
I aim to FIRE in 2-3 years but will have a ‘tail’ of taxable income for about 5 years after that. The attraction for me of a PIC would be to invest over those years and allow all of the dividend income to roll up and be reinvested inside the PIC. As I understand it that would create no corporation tax liability. Then when my income from employment has ceased I would start to draw out the returns as a basic rate tax payer.

I will be an additional rate taxpayer for about 5 years after retirement. My thinking was to invest in a HYP type portfolio inside a PIC, funded by a director’s loan. Then for those first 5 years while any naked dividend income would be taxed at the highest rate, I can let my dividends roll up free of tax in the PIC. Then I can repay the directors loan, then I can finally begin to draw the rolled up dividend income as a dividend from the PIC, once my other sources of taxable income have ceased.

hiriskpaul
Lemon Quarter
Posts: 1338
Joined: November 4th, 2016, 1:04 pm
Has thanked: 35 times
Been thanked: 318 times

Re: Personal investment companies

#214945

Postby hiriskpaul » April 14th, 2019, 10:25 am

Spet0789 wrote:
syrio wrote:Well it depends on what your income is during your time up to retirement, and to what extent your investment income makes you pay higher rate tax.

If you had 800k invested in VWRL, you would have about 16k in dividends. I can't see it being worthwhile.

If you had £10M, receiving about 200k in dividend income, perhaps it is worthwhile if you wanted to stay as a basic rate taxpayer. But you wouldn't really be able to benefit from your money as you are limiting your income and can't really spend the money in the company.


From my original post:-
I aim to FIRE in 2-3 years but will have a ‘tail’ of taxable income for about 5 years after that. The attraction for me of a PIC would be to invest over those years and allow all of the dividend income to roll up and be reinvested inside the PIC. As I understand it that would create no corporation tax liability. Then when my income from employment has ceased I would start to draw out the returns as a basic rate tax payer.

I will be an additional rate taxpayer for about 5 years after retirement. My thinking was to invest in a HYP type portfolio inside a PIC, funded by a director’s loan. Then for those first 5 years while any naked dividend income would be taxed at the highest rate, I can let my dividends roll up free of tax in the PIC. Then I can repay the directors loan, then I can finally begin to draw the rolled up dividend income as a dividend from the PIC, once my other sources of taxable income have ceased.

Because there is no CT on dividends, but there is on capital gains, high yielding shares are tax efficient. But you may still make capital gains and there is no CGT allowance as there is for private investors. No further indexation allowance is permitted either.

Another possibility you might like to consider is to personally invest in low to zero yielding shares instead. Then just sell sufficient each year to utilise your CGT allowance. If you are married, you can transfer half the sum to your wife and use 2 allowances and even give some to your kids if you are feeling generous! A large chunk in Berkshire Hathaway might be a good defensive option for a company that pays no dividends. A financial yes, but wrapping a diversified investment portfolio.

Even if you do end up paying CGT later on, you might be able to keep it in the basic rate 10% band. Much better than paying 32.5% or more on dividends for the next few years.

Another possibility is to flip backwards and forwards between accumulating ETFs. If you time your trades right either side of the end of the reporting period you can roll up dividends free of tax and delay taking capital gains until a time of your choosing.

If you don't want to give money away, another option is a tax free loan to someone you trust who is not a higher rate taxpayer. They invest your loan, receive dividends and capital gains. Then they pay you back at some future time. Any profit has to be kept by whoever you lend to and you have to be prepared to write off a loss they might make, but overall the tax is likely to be lessened.

I suspect that these kind of options will work out cheaper for you overall than using a PIC.

Walkeia
Posts: 20
Joined: April 27th, 2019, 8:03 am
Has thanked: 7 times
Been thanked: 13 times

Re: Personal investment companies

#217669

Postby Walkeia » April 27th, 2019, 9:24 am

Hi Spet,

I have looked into PICs over the past two years. I have set up and run a PIC personally after the change in the pension rules in 2016; it holds a commercial property and investment trusts. My general takeaways are:

1. financially it's not a slam dunk - the reason i think most investors are not doing this.

You will need to build an excel sheet for your proposed portfolio and make assumptions for the returns and their nature - capital gain vs. income. In addition, you'll need to factor in the CGT allowance you and your wife will be foregoing (unless you have other personal assets) plus how and when you plan to take money out. There's a fair few other variables you can add - but I think you get the drift - it's messy and it's all forecasting the future so we could be one budget away from it all changing.

2. The case becomes more compelling when a) it's big sums involved as the impact of personal capital gain allowances, costs of running PIC have diminishing influence on returns. b) you plan to leave the money for a very long period of time - similar to a SIPP so you can benefit from lower corporation tax and compound the returns if you are a higher or additional rate tax payer (i don't think this is what you're planning). Other factors also have a significant impact - such as assets already held in your name, we only hold VCTs, ISA and SIPP and our home in our name so if i stopped work I would have all my personal allowance capacity available and my partners.

So why did I do it

I have a very long term plan and believe the compounding effect on a long term horizon will place me ahead. However, the key factor for me is the flexibility a PIC introduces. I am in my early 30s and the ability to control all my assets (property and market investments) via shares is very appealing. I believe if I were to leave the country today there would also be tax options but I remain to see if these are available in 15y+ time. Lastly, I am pursuing an aggressive investment strategy - using 30% margin to leverage returns; I want to do this in a limited company as a cheap option of underwriting my personal downside in the case of an unexpected accident.

Overall it's an area where specialist advice is needed.

Spet0789
Lemon Slice
Posts: 843
Joined: June 21st, 2017, 12:02 am
Been thanked: 63 times

Re: Personal investment companies

#224630

Postby Spet0789 » May 27th, 2019, 3:49 am

Walkeia wrote:Hi Spet,

I have looked into PICs over the past two years. I have set up and run a PIC personally after the change in the pension rules in 2016; it holds a commercial property and investment trusts. My general takeaways are:

1. financially it's not a slam dunk - the reason i think most investors are not doing this.

You will need to build an excel sheet for your proposed portfolio and make assumptions for the returns and their nature - capital gain vs. income. In addition, you'll need to factor in the CGT allowance you and your wife will be foregoing (unless you have other personal assets) plus how and when you plan to take money out. There's a fair few other variables you can add - but I think you get the drift - it's messy and it's all forecasting the future so we could be one budget away from it all changing.

2. The case becomes more compelling when a) it's big sums involved as the impact of personal capital gain allowances, costs of running PIC have diminishing influence on returns. b) you plan to leave the money for a very long period of time - similar to a SIPP so you can benefit from lower corporation tax and compound the returns if you are a higher or additional rate tax payer (i don't think this is what you're planning). Other factors also have a significant impact - such as assets already held in your name, we only hold VCTs, ISA and SIPP and our home in our name so if i stopped work I would have all my personal allowance capacity available and my partners.

So why did I do it

I have a very long term plan and believe the compounding effect on a long term horizon will place me ahead. However, the key factor for me is the flexibility a PIC introduces. I am in my early 30s and the ability to control all my assets (property and market investments) via shares is very appealing. I believe if I were to leave the country today there would also be tax options but I remain to see if these are available in 15y+ time. Lastly, I am pursuing an aggressive investment strategy - using 30% margin to leverage returns; I want to do this in a limited company as a cheap option of underwriting my personal downside in the case of an unexpected accident.

Overall it's an area where specialist advice is needed.


Many thanks. Very helpful. All makes sense and food for thought here.


Return to “Retirement Investing (inc FIRE)”

Who is online

Users browsing this forum: No registered users and 2 guests