Showing posts with label profits. Show all posts
Showing posts with label profits. Show all posts

Friday, June 26, 2020

Investing directly vs. through a holding company

It's quite common in continental Europe for private equity investors or entrepreneurs to invest in projects through a holding company, either onshore of offshore. 

Not quite so in the UK, mostly because a number of tax benefits are not available in such a situation. And yet it might be a good idea nonetheless.  Let's look at the pros and cons of each approach.

Benefits of investing directly

If you are investing in a company that has the EIS or SEIS status, you need to do the investment directly in order to benefit from the generous tax breaks. 

If you sell investments you will be taxed only once vs having the holding company pay tax on the gain first and pay tax again when you extract the profits from the holding company. 

And also, investing directly is cheaper because you don't need to maintain another structure. 

Benefits of investing through a holding company

If your investment distributes surplus profits regularly to the holding company, no dividend tax is due since dividends are only taxed when they are distributed to the final shareholders. That allows you to ring-fence those profits as if the underlying investment were to go bankrupt, those profits are now protected one level up. 

Another benefit is that when you have multiple investors, they will probably have different time preference when it comes to profit extraction. Having a holding company allows you to be neutral to the timing of those distributions since the tax point is now decided by the extraction at the holding level.

One of the benefit of direct investing is the avoidance of double taxation. However there are situations where those can be avoided. Such a case is the Substantial Shareholding Exemption where the holding company owns more than 10% of an investment for the last 2 years. 

And finally, if you keep the profits in the holding company to be reinvested, you can delay the dividends tax forever. 

Tuesday, November 15, 2011

Dividends: dos and don'ts

Distributable profits

Dividends must be paid out of distributable profits and directors must prepare relevant accounts to confirm the position. If it later transpires there are not enough distributable profits and relevant accounts were not prepared then the dividend is illegal and repayable, and should be disclosed as such.

Thursday, September 8, 2011

The Tough Times Business Checklist

With business conditions deteriorating for a lot of firms, now could be the time to review the way you run your business.

With the help of consultancy group 2020 we have put together a "tough-times business checklist" that will allow you to ensure that you stay on the right track during the turbulent times ahead:

  • Review your Budgets and set realistic and achievable targets for the year. 
  • Get rid of can’t pay/won’t pay customers. 
  • Review debtors list and chase up overdue invoices. 

Friday, March 11, 2011

How much tax do you pay on dividends?

Taxation of dividends in the UK has always been confusing. The rates people mention are actually different from the effective rates for some legacy reasons. As if tax was not complicated enough...

There used to be 2 dividend tax rates but this changed last year. There are now 3 different rates depending on your tax band. And with the introduction of the new band at 50% called top rate income tax threshold a new band was introduced as well for dividends. Here they are:
  • 10% on dividends for income received below the higher rate income tax threshold (£37,400)
  • 32.5% on dividends for income received above the higher rate income tax threshold
  • A new 'additional' dividend tax rate of 42.5% applies to individuals earning £150,000 or more from April 6th 2010 onwards.
However the calculation is a bit convoluted. The actual rate of tax you pay in dividends is lower than these headline rates, as dividends automatically receive a 10% tax credit. This is to take into account the fact that you will already have paid corporation tax on your company profits.

Sunday, January 23, 2011

Extracting profits from your company

One of the benefits of running your own company is that it gives you a lot of flexibility when it comes to extract profits from the firm. As a sole trader, whatever profit you make is taxed immediately at a rate that depends on the amount of profits but that can now be as high as 58% if we include Class 4 National Insurance Contributions.

If you own a limited company however you have a lot more flexibility and if you are not needing the cash now, you can reduce your tax considerably. In most cases it's just a matter of following those simple steps:
  1. If, as a director, your only revenue comes from your company, you can extract up to the personal allowance without paying personal taxes and that cost is tax deductible for your company. That amount is currently £6,475 but it should increase up to £10,000 in the next few years. Keep in mind however that if your annual salary is £5,715 or more you will incur some national insurance contribution costs. This is why most directors extract just that amount every year: no tax, no NI and allowable expense for the company.