Finance - Finding the golden return

Surplus profits generated by companies are often held on deposit or on the money market. If this cash is not earmarked for short-term needs then it may be possible to generate a better and more tax-efficient return elsewhere. Many companies already take such steps, however it is important to be aware of tax changes that may impact upon these arrangements.

Many companies will have a capital redemption bond that has no lives assured, provides no death benefits and where the investor has control over when the policy is cashed in. This has meant that CRBs have been more suited to corporate investors.

However, since 10 February 2005 companies have no longer enjoyed the tax-deferral advantage that came with CRBs. Furthermore, changes to the law have not only applied to new arrangements but also to any company already owned on 10 February 2005. Any chargeable gain deemed to have arisen as at 10 February 2005 will be carried forward until the CRB is surrendered or assigned, at which point the held-over chargeable event gain will be brought into account for corporation tax.

In addition, each year thereafter, any increase or decrease in the value of the CRB will be treated as a profit or loss under the loan relationship rules. This eliminates the tax deferral benefits that were the rationale for the policy in the first place.

Many companies now hold single premium investment bonds, notwithstanding the issue of having to have a life assured. However, October 2007's pre-Budget statement announced that, for accounting periods beginning on or after 1 April 2008, any life assurance policy that has, or is capable of having, a surrender value will also be taxed under the loan relationships legislation. So once again the benefits of tax deferral are being lost.

Remainder

The options we are left with centre around unit trusts, or open-ended investment companies. They should be considered because the taxation on them is still favourable over limited companies.

There is no capital gains tax on the unit trusts. Realised gains are only taxed on the company at corporation tax rates when the investment is encashed in whole or part. A fund of funds or similar wrapped arrangement could be used to allow ongoing rebalancing of the asset allocation and fund replacement without incurring a tax liability.

Also, be aware that distributions received by the company may be taxable depending on the type of income received by the unit trust.

Indexation, the annual increase in the retail price index, is still allowable for gains made by companies. This means that the capital gain subject to tax excludes any increase in value owing to inflation.

Investments can be cashed in at any time, including in those years in which the company is making a loss. All gains on unit trusts can be offset against such losses while the gains can also be offset against pension contributions paid by the company.

It is important to keep an eye on the level of investments. As a rule of thumb, if the value of investments exceeds 20% of the value of the company then the trading status may be jeopardised, which may have adverse implications for business asset taper relief. If the level exceeds 50% then business property relief may be affected, which will have inheritance tax implications.

Finally, as with all investments, the tax tail must not wag the investment dog. The investment principles of asset allocation, diversification and annual rebalancing are essential to maximise the potential for growth and to manage investment risk.

- Bob Fraser, wealth adviser, Towry Law.