Corporate investing – Making a return on excess ‘cash in the bank’

Whilst the pandemic continued throughout 2021, bringing with it further challenges for some businesses and industries, many others have come through this difficult time finding themselves with surplus cash within the businesses. Typically, in these instances, funds may be distributed as dividends to shareholders, or reinvested into the company for growth and potential future return.

However, there are often situations where a company may not wish to distribute, preferring to keep these monies in the business, but there is perhaps not the immediate opportunity, or it is not appropriate at that time for it to be reinvested into the company itself. At this point, the company/Directors may wish to consider investing these funds to generate a better return than is commonly achievable within basic bank deposits.

Life insurance contracts, usually containing the right to surrender the value, are fairly well known for these purposes, but less known are the benefits of investing in Authorised Investment Funds (AIFs).

What are AUTs and OEICs?

Authorised Unit Trusts (AUTs) and Open-Ended Investment Companies (OEICs) are collective investment schemes, allowing multiple investors to pool their assets and invest in a managed portfolio of gilts, bonds and equities and therefore spreading and reducing the risk of the investments, whilst still allowing potential for growth.

These portfolios must have the following characteristics:

1. the contributions to be invested and the income out of which payments are to be made to them are pooled,
2. the property is managed by, or on behalf of, the operator of the scheme

Company Investing in OEICs and Taxation

Crucially OEICs do not pay UK tax on dividend income and capital gains made by OEICs are not taxable.

Dividends or interest will be received from the OEIC or AUT. A treatment known as “corporate streaming” applies to corporates investing in OEICs or AUTs and receiving dividend distributions. These rules ensure corporate investors pay the right amount of tax. Accordingly, the dividend will be split by the OEIC provider, so that part is treated as receipt of tax-free dividend and part as receipt of taxable interest. The calculation ensures that the company’s share of taxable income is not treated as tax-free dividend.

Dividends received by UK companies are not subject to corporation tax and interest will be received gross and is taxable.

For a smaller entity using historic cost accounting, regardless of the fund type, the gain will simply be subject to corporation tax on disposal (including on fund switching). Where it’s a larger company using fair value accounting, then a fund passing the ‘60% test’ falls under the same loan relationship rules as Life Insurance contracts/Bonds and so will be revalued and taxed annually. Equity funds are not treated in the same way and, although the accounts might reflect the growth, the tax would not follow suit and would only arise on disposal.

If you would like to learn more about different methods of investing on behalf of your business, please contact Kreston Reeves Financial Planning, part of the Craven Street Wealth group on +44 (0)330 124 1399, or complete our online enquiry form.

The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.

You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.

Kreston Reeves Financial Planning Limited, Independent Financial Advisers. Authorised and regulated by the Financial Conduct Authority.