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We often get asked whether setting up a UK limited company for investments is a good idea. This is a regular query from clients who have a bit of extra cash in a trading company and do not want to pay the tax on extracting it to then invest it somewhere.
The answer as to whether it is beneficial depends on their investment goals, tax situation, and long-term plans.
Many investors consider using a limited company as a tax-efficient way to manage and grow their investments and it is particularly beneficial in the following scenarios:
Benefits
Lower tax – Profits made by a limited company are subject to corporation tax rather than personal income tax. The UK corporation tax rate is generally lower than higher-rate and additional-rate income tax brackets for individuals. This can lead to significant tax savings, particularly for high earners.
Retained earnings for reinvestment – Unlike personal investments, where gains are taxed immediately upon sale, a company can retain profits and reinvest them without facing personal tax liabilities.
Inheritance tax planning – A company structure may offer more flexibility for estate planning and passing wealth to future generations. By holding investments through a company, you can structure ownership via shares and potentially reduce inheritance tax liabilities.
Drawbacks
Higher compliance and admin costs – Running a limited company comes with additional responsibilities such as filing annual accounts and preparing corporation tax returns. Accountancy fees and other costs may outweigh the benefits for smaller investments.
Tax on withdrawals – Although corporation tax rates are lower, withdrawing money from the company through dividends or salary may result in personal tax liabilities. This is an important consideration for those who need immediate access to investment returns.
Asset introduction – Previously owned assets being sold to the company could result in capital gains tax or stamp duty if not planned correctly.
A UK limited company can be useful for managing investments efficiently but it’s not for everyone. If you’re considering this route, consulting with an accountant is essential to ensure the structure aligns with your financial goals.
Every investor’s situation is unique and professional advice can help you make the most informed decision.
As the 2024/25 tax year draws to a close, now is the perfect time to review your finances and ensure you make the most of available tax allowances and reliefs before the new tax year begins on 6th April 2025.
The question of what structure a client should trade as comes up again and again – both with start-ups and businesses already in existence.
Following the Autumn Budget on 30 October 2024, we are summarising the key announcements to assist our clients and business community in tax planning and decision making.