We are living in a period of historically low interest rates and, as a result, cash deposits have become an ineffective way of preserving the purchasing power of capital. There is now a significant risk that inflation will erode the real value of assets held in cash over an extended period.
For business owners formulating a strategy to manage the appropriate level of corporate cash, the first step to is to decide whether an investment policy should be adopted. Some key considerations of this process are:
This article is taken from the latest issue of Insights for Business Owners, a twice-yearly email publication which provides business owners with expert analysis of the latest economic & investment topics affecting corporates, as well as special features and profiles of leading business owners.
This is a complex area as it involves dealing with the requirements of the company and the personal objectives of the shareholders. Each case should be dealt with based on the particular facts and objectives of the business and the shareholders. However some options that you could consider are:
Rather than investing the funds in the company, consider funding your pension and investing through this structure. Some of the advantages and disadvantages of this approach include:
A pension should form a part of any business owner’s financial lifetime plan as it gives many options to the shareholder when he/she has to deal with the succession of the business and the equalisation of the estate, while it also provides for an independent source of income in retirement.
Where the funds are invested through the trading entity, then accessing the markets can be done in two ways:
a) through a gross roll up structure; or
b) through direct holdings.
It should be noted that investing through a corporate structure exposes the shareholder to a double tax charge: the first on the sale by the company and the second on the extraction of the net funds by the shareholder.
a) Gross roll up structures (funds/indices)
A gross roll up structure allows the company to invest for an eight-year period before incurring a tax charge where a payment on account equal to 25% of the growth in the fund will arise. On the ultimate sale of the investment (be that partial or otherwise), credit is available for the eight-year charge against the ultimate liability.
b) Direct holdings
At a basic level these types of investments are stocks and shares, bonds, property and cash, which pay CGT on gains at 33% and 25% corporation tax on dividends and interest versus the 25% fund exit tax and potential surcharge of 15% (20% of the net funds of 75% = 15%).
A summary of the tax rates for corporates is outlined in Figure 1.
Figure 1: Summary of corporate tax rates (as at October 2017)
1 Subject to certain conditions with a credit for underlying foreign tax
2 Refer to Revenue's guide to Corporation Tax
3 Part 13 Revenue Manuals and Guide to Corporation Tax
4 Refer to Revenue's guide to Capital Gains Tax
5 Section 607 Taxes Consolidation Act 1997
Some of the other considerations to be taken into account when company owners invest surplus cash include:
There are a number of tax and structuring issues that business owners need to take into account when investing surplus corporate cash. Each case is different and the approach taken should be looked at as part of a tailored personal financial and succession plan.
If you would like to discuss these options and the best route for your business to invest surplus cash, please contact a Davy adviser.