However, you should be aware that retaining cash can also have adverse tax consequences if you are planning to re-organise, sell shares, or if your business suffers a drastic downturn.
To protect yourself from these risks, tax planning is crucial. There are a number of ways to shelter surplus cash balances through appropriate investments at varying levels of risks. Here, we take a look at the ways you can extract cash and protect your business’s assets.
In 2016, new cash extraction rules were introduced in the UK. These rules saw a hardening in tax regulations which previously enabled business owners to extract cash from their business at favourable rates.
The rules now target business owners seeking to realise value by winding-up their companies and starting a new business in its place. You will no longer be able to take advantage of the low-rate of capital treatment by converting profits into cash. One of the best alternatives is to look into investing your surplus.
If you instead choose to invest your surplus cash rather than extract it, you need to do some careful planning first.
Never invest more money than you can afford. If you tie-up money in investments for the long-term, you will not be able to access it for the day to day running of your business, so calculate exactly how much surplus cash you have to invest first.
There are a number of HMRC ‘approved’ investments which give the investor tax reliefs based on the fact that the investments are high risk. Three of the schemes are as follows;
Seed Enterprise Investment Schemes (SEIS) – This gives the investor income tax relief at 50% on any investment in the company up to a maximum investment of £100,000. It is also possible to defer capital gains on the disposal of other assets using the SEIS investment.
A sale of the SEIS shares after three years is free of capital gains tax.
Enterprise Investment Scheme (EIS) – EIS is similar to SEIS but the income tax relief is at 30% and the maximum individual investment is £1m.
As with SEIS, deferral relief on share gains is available and after three years the disposal, EIS shares are capital gains tax free.
Venture Capital Trusts (VCT) – VCT investments provide the investor with income tax relief at 30% on any investment up to a maximum of £200,000.
Any dividends paid by the VCT are tax free and any disposal of VCT shares are free of capital gains tax after three years. However, capital gains tax deferral relief is not available.
The above is a summary of the potential benefits of these schemes however there are complex qualifying rules for both the companies and investors concerned to meet and proper advice should be obtained prior to any investment being made.
In the short-term, an investment is unlikely to have a higher rate of return than paying down your debt. When you realise you have a cash surplus in your business, you may want to look into paying down debts in your business instead.
To discuss realising the value of your business and extracting cash in the best way for your company, talking to a professional advisor is the best approach. Contact our team today to discuss how we could help you.