Can You Invest Money From a Limited Company?

While running a business, it's possible that you accumulate surplus cash in the firm. One of the ways to put the money to effective use is through corporate investment. But the question that arises is, can you invest money from a limited company? The answer is a resounding yes. However, the process involves various factors such as taxation, investment vehicles, and potential risks.

This insight walks you through the details of Limited Company investing, also known as Corporate.

Key Takeaways

• Limited companies can invest their extra funds to promote growth and tax efficiency, requiring careful planning and expert guidance.
• Investing surplus cash can yield higher returns than idle bank accounts, while neglecting investment opportunities may lead to increased taxes and missed growth.
• Corporate investing offers benefits like diversification and additional revenue streams, but it entails risks such as potential losses and tying up funds.
• Companies can choose from options like funds, trusts, pensions, individual shares, bonds, and commodities, aligning investments with their goals, risk tolerance, and financial strategy.

Can You Invest Money From a Limited Company?

Yes, a limited company can use its extra money to invest in different places instead of keeping it sitting around. This can help the company's money grow and be more efficient for taxes. But this process involves thinking about taxes, where to invest, and possible risks. Getting advice from experts can make this investing process smarter and safer for the company's extra money.

When a sole owner of a limited company invests funds, the balance sheet reflects these as assets. Long-term investments, held for an extended period, appear as non-current assets, while short-term investments, quickly convertible to cash, are listed as current assets. Equity investments show ownership in other companies. Categories vary based on investment type and accounting standards. Consulting an accountant ensures accurate and compliant reporting on the balance sheet.

Understanding Corporate Investment

Corporate investment is the process where a business invests its surplus cash or profits in different avenues rather than holding it in cash bank accounts or drawing it as income. This strategy can be tax-efficient and provide an opportunity for the firm's money to grow, rather than leaving it idle in a savings account with a low interest rate.

Why is Corporate Investment Necessary?

When a business owner withdraws a significant amount from the company that isn't used and simply sits in the bank account, it can result in a hefty tax bill. On the contrary, allowing profits to pile up in the business account means the money isn't actively working for the company. Thus, investing the surplus cash into well-thought-out investments can be a wise decision.

Pros and Cons of Corporate Investing

Like any financial decision, corporate investing comes with its set of advantages and potential drawbacks. It's essential to weigh these before investing your company's money.

Advantages

The reduction in corporation tax in recent years has made corporate investing more appealing. The tax, applied to all profits a business makes and returns on any investments, has dropped from 28% in 2010/11 to just 19% in 2020/21. Moreover, in 2023, the corporation tax rate has been further reduced to 24%. This decrease implies that business owners can now invest their surplus profits in various ways without incurring hefty tax bills. The lower tax rate encourages investment and stimulates economic growth, as it allows businesses to retain more of their profits for expansion, innovation, and job creation

Other advantages include:

Diversification into other securities and assets, providing your business with multiple revenue streams.

Potential generation of additional money that can be reinvested into your business.

Offering your surplus cash an opportunity to grow rather than sitting idle in a low-interest savings account.

Disadvantages

The primary risk with any investment is the prospect of losing money. This holds true even if you choose historically stable securities or assets, as you could still lose money if the investment market crashes. Therefore, understanding your risk appetite is crucial before you venture into corporate investing.

Investing through the company may not be suitable if your business requires immediate access to cash to bolster its cash flow, or if your business model isn't yet steady and consistent, tying up your money may not be practical. It's also worth noting that if you're planning to make significant investments in your business in the near future, corporate investing may not be ideal.

Choices for Corporate Investment

When deciding where to invest surplus money from a limited company, there are several important factors to consider. The best option depends on what the company hopes to achieve and its comfort level with different investment choices.

Funds:

Unit Trusts: These are collections of stocks, bonds, or other securities managed by professionals. They offer diversification, making them a good choice for those who want to spread risk.

Sector-Specific Funds: If the company believes that a particular industry will perform well, such as real estate, technology, or healthcare, it can invest in funds that focus on that sector.

Trusts:

Pooling Resources: Trusts involve joining forces with other investors to create a larger pool of money. This can lead to investments in a wider range of assets or sectors, potentially reducing risk.

Pensions:

Tax-Efficient Retirement Planning: Investing in company pension schemes is a smart way to both provide for employees' retirement and gain tax advantages. Contributions to pension funds are usually tax-deductible for the company.

Individual Shares:

Direct Ownership: Buying shares in specific companies gives the company a direct stake in their success. However, this approach requires careful research and understanding of the stock market.

Bonds:

Government Bonds: These are low-risk investments where the company lends money to a government and receives interest in return.

Corporate Bonds: Companies can issue bonds to raise money. They can offer higher returns than government bonds but come with some level of risk.

Commodities:

Tangible Assets: Investing in physical goods like gold, oil, or agricultural products can act as a hedge against economic uncertainties. Commodities can have value independent of the financial markets.

Examples of Why a Limited Company Might Want to Invest:

Growth and Expansion

The company might want to invest in sectors that align with its business activities. For example, a technology company might invest in other tech companies to expand its reach and influence.

Diversification

Putting all the company's money in one place can be risky. By spreading investments across different assets, the company can reduce the impact of a poor-performing investment.

Tax Efficiency

Certain investments can offer tax advantages. For instance, making pension contributions can decrease the company's taxable profits.

Inflation Protection

Investments like property and commodities can act as a buffer against inflation, helping to maintain the value of the company's money over time.

Generating Passive Income

Dividends from shares or interest from bonds can provide a steady stream of income for the company, which can be useful for covering expenses or reinvesting.

Preparing for the Future

By investing wisely, the company can build up reserves for future projects, acquisitions, or unexpected expenses.

Remember, the choice of investment should align with the company's goals, risk tolerance, and overall financial strategy. It's often helpful to consult with financial professionals who can offer tailored advice based on the company's unique situation.

Tax Considerations in Corporate Investing

When investing the company's surplus money, it's essential to understand your tax obligations. For example, small companies will be taxed on any 'basic financial instrument' investments once they're realised. However, other investments such as commodities will need to be declared on your annual tax return.

Also, consider if your investments will push you over the capital gains tax threshold, which is £12,300 for the 20/21 tax year. If planning for estate when making corporate investments, consider if you qualify for business property relief, allowing business-related assets to be passed down tax-free after two years.

Seeking Professional Advice Before Investing

Corporate investing, while potentially beneficial, can be complex, especially when it comes to managing tax efficiently. To ensure you maximise the tax-efficiency of your investments and minimise your tax burden, it's best to consult with an accountant. They can help you understand how much tax you'll potentially pay on your revenue and profits.

If you're unfamiliar with the investment landscape, seeking guidance before diving in is a smart move. An independent financial adviser can help you understand your risk tolerance and provide impartial advice.

Investing Through a Limited Company Vs. a Trading Company

Whether to invest through the limited company itself or through a separate investment company is another consideration to make. While investing through the limited company might be more tax-efficient, it may affect your eligibility for certain tax reliefs. Investing through a separate investment company, on the other hand, might involve additional duties and administrative costs but provide certain benefits like financial segregation.

Conclusion

In conclusion, yes, you can invest money from a limited company, but the process requires careful thought and consideration. From understanding the tax implications to choosing the right investment vehicles and considering the potential risks, corporate investing is a complex process. Professional advice from an accountant or financial adviser can be invaluable in navigating this journey. By investing wisely, your company's surplus cash can potentially offer significant benefits for your business.