Investing Money from a Limited Company

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When you’re running a limited company, it’s possible to generate additional funds, which you may wish to put into corporate investments. The key question that often emerges is: can I invest money from a limited company? The answer to this question is a definite “yes.” Nevertheless, you need to consider factors such as tax, investment options, and potential risks. This guide will provide a comprehensive overview of investing within a limited company, also called corporate investing.

Contact our friendly team today if you’re looking for professional advice on investing money from your limited company. You can also book an appointment online here. Alternatively, see how we can help your limited company with Corporation Tax, VAT Returns, and much more, or carry on reading for more information on corporate investing.

Disclaimer: Please note that we are tax advisors, not IFAs, and we advise only on tax. An IFA is needed for any financial services or pensions advice.

Table of Contents

Can I Invest as a Limited Company? Key Points

For your limited company to grow and save tax, yes, you can invest surplus cash (otherwise known as corporate investment), but this requires careful planning and expert advice. Read the key points to consider below:

Investment benefits: Investing accumulated funds can make more money than just keeping them in a bank. Ignoring investment opportunities could mean paying more in taxes and missing out on growth.
Investment risks: Corporate investing has its benefits like spreading risk and getting extra income, but it also has risks like losing money and not being able to access your funds quickly.
Investment options: Limited companies have various options for investing, like funds, trusts, pensions, individual stocks, bonds, and commodities. They can choose what suits their goals, risk tolerance, and financial plan.

Investments – The Company Balance Sheet

When a sole owner of a limited company puts money into the business, the balance sheet records this as assets. If the investments are meant for the long haul, they’re classified as non-current assets. If they can be turned into cash quickly, they’re categorised as current assets. Equity investments represent ownership in other companies. The specific categories depend on the type of investment and accounting rules. To ensure precise and compliant reporting on the balance sheet, it’s a good idea to consult with an accountant.

What is Corporate Investment?

Corporate investment is when a limited company uses its extra cash or earnings to invest in various opportunities instead of keeping it in a bank account or taking it as income. This approach can offer tax benefits and the potential for the company’s money to increase, rather than letting it sit in a savings account with minimal interest.

Why Invest Money Through a Limited Company?

If a business owner takes out a substantial sum from the company and leaves it sat in the bank account, it can lead to a substantial tax liability. On the flip side, if profits accumulate in the business account, the money remains stagnant and doesn’t contribute to the company’s growth. Therefore, putting the surplus cash into carefully considered investments can be a smart choice.

Below are some examples as to why your limited company might want to invest:

Growth and Expansion: Your limited company may choose to venture into sectors that complement its core business activities. For instance, if you’re a technology company, you could invest in other tech companies to broaden your reach and influence.
A Spread of Funds: Concentrating all your limited company’s funds in one place can pose risks. By dispersing investments across various assets, your company can mitigate the impact of underperforming investments.
Tax-Saving: Certain investments can provide tax benefits. For example, contributing to pension plans can lower your limited company’s taxable profits.
Protection against Inflation: Investments such as real estate and commodities can safeguard against inflation, preserving the value of your limited company’s money over time.
Passive Income Stream: Earnings from shares through dividends or bond interest can offer a consistent passive income for your limited company, which is beneficial for covering expenses or reinvestment purposes.
Preparation for the Future: Through informed investments, your limited company can accumulate reserves for upcoming projects, acquisitions, or unforeseen expenses.

Remember, the selection of investments should align with your limited company’s objectives, risk tolerance, and overall financial strategy. Seeking advice from financial professionals, tailored to your limited company’s specific circumstances, can be valuable.

Corporate Investing: Advantages and Disadvantages

Like any financial choice, corporate investing has its share of benefits and possible downsides. It’s crucial to evaluate these aspects before you decide to invest your company’s funds.

Investment Advantages

Lower corporation tax rates make corporate investing more attractive. This means that business owners can invest their extra profits in diverse ways without facing substantial tax burdens. The lower tax rate promotes investment, sparking economic growth by enabling businesses to keep more earnings for expansion, innovation, and job creation.

Other advantages of investing money through a limited company might include:

Revenue streams: Expanding into different securities and assets can create multiple revenue streams for your business.
Extra funds: Investing may generate extra funds that can be reinvested into your business.
Growth: Rather than extra cash remaining idle in a low-interest savings account, investing gives it a chance to grow.

Investment Disadvantages

The primary concern in any investment is the potential for financial loss. This remains true even when investing in historically stable securities or assets, as a market downturn could still result in losses. Therefore, it’s essential to understand your risk tolerance before delving into corporate investing.

Investing through the company might not be suitable if your business urgently needs access to cash to improve cash flow. Additionally, if your business model is not yet stable and consistent, tying up funds may not be practical. It’s also important to consider that corporate investing may not be the most suitable option if you have plans for substantial investments in your business in the near future.

Corporate Investment – Tax Responsibilities

When allocating your limited company’s additional funds, it’s crucial to understand the associated tax responsibilities. For instance, small companies will face taxation on ‘basic financial instrument’ investments when they’re realised. On the other hand, investments like commodities must be reported in your limited company’s annual tax return.

Also, assess whether your investments might surpass the capital gains tax threshold, set at £6,000 for the 2023/24 tax year. If you’re strategising for estate with your corporate investing, evaluate if you meet the business asset disposal relief criteria, enabling the tax-free transfer of business-related assets after two years (if you qualify).

How to Invest Through Your Limited Company

Various factors should be considered when determining where to allocate extra funds from your limited company. The best choice relies on your company’s goals and level of comfort with different investment options – please see below:

Investment Funds

Unit Trusts: These cover portfolios of stocks, bonds, or other professionally managed securities. They provide diversification, making them suitable for those seeking a spread of risk.
Sector Funds: In cases where a limited company anticipates strong performance in a specific industry, such as healthcare, real estate, or technology, it can opt for funds specifically concentrated on that sector.

Investing through Trusts

Pooling Resources: Trusts involve collaborating with other investors to form a larger pool of funds. This collaboration can result in investments across a broader range of assets or sectors, potentially minimising risk.

Pension Scheme Investments

Tax-Efficient Planning for Retirement: Investing in company pension schemes is an intelligent approach to provide for your employees’ retirement while enjoying tax benefits. Typically, contributions to pension funds are tax-deductible for your limited company.

Investing in Shares

Direct Ownership: Acquiring shares in specific companies provides your limited company with a direct interest in their success. However, this strategy demands thorough research and experience of the stock market.

Bond Investments

Corporate Bonds: Businesses can issue bonds to generate funds, potentially offering higher returns than government bonds but carrying some degree of risk.
Government Bonds: These are lower-risk investments, as your limited company lends money to the government and receives interest in return.

Investing in Goods

Tangible Assets: Allocating funds to physical commodities, such as agricultural products, gold, or oil, can safeguard against economic uncertainties. The value of goods can stand independently of financial markets.

Invest Through a Limited Company or a Trading Company?

Another factor to consider is deciding whether to invest directly through your limited company or via a separate investment company. While investing through your limited company could be more tax-efficient, it might impact your eligibility for specific tax reliefs. On the other hand, investing through a separate investment company may entail extra responsibilities and administrative expenses, but could offer advantages such as financial segregation.

Need Help with Corporate Investing?

Corporate investing, though potentially advantageous, can be intricate, particularly in terms of tax management. To optimise the tax efficiency of your investments and reduce your tax liability, we advise consulting with one of our accountants, who can clarify the potential tax obligations on your revenue and profits. Schedule an appointment through our online booking system, reach out via our online form, call us at 0330 223 6441, or email us at hello@mercianaccountants.co.uk today.