Corporate investing: How to invest cash from your business | (2024)

Corporate investing: How to invest cash from your business | (1)

Corporate investing is a way to put your business’s surplus cash to good use. Instead of just holding all your cash in the bank, you can put some of it into investments to (hopefully) generate additional revenue. Sometimes this can even help you reduce your tax obligations. Here’s your introduction to corporate investing.

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What is corporate investing?

Corporate investing simply investing the profits / surplus cash of your business, instead of drawing it as income or holding it in cash bank accounts. It’s also a way to withdraw additional money from a company in a tax-efficient way, when it is not intended to be used as income.

Although a business owner can choose to pay themselves in dividends or through a salary, taking too much out of the business to simply sit in your bank account can result in a hefty tax bill. Conversely, allowing profits to mount up in your business account means this money isn’t actively working for you or the company.

Withdrawing money to place into carefully considered investments can be a savvy decision. Sometimes, re-investing cash into your business or distributing it among shareholders won’t be appropriate, making corporate investments an attractive option.

What are the advantages of corporate investing?

In recent years, corporation tax, which applies to all profits a business makes and returns on any investments, has plummeted from 28% in 2010/11 to just 19% in 2020/21 (though it is scheduled to rise to 25% in 2023 for all but the smallest companies). This decrease has meant that investing profits is now more attractive to companies. Rather than having to choose tax-efficient vehicles like pensions for their excess profits, business owners are now free to invest in lots of ways without incurring large tax bills.

Some of the other plus points include:

  • Diversifying into other securities and assets to give your business multiple revenue streams
  • Potentially generating more money that can be reinvested into your business
  • Giving your surplus cash a chance to grow rather than leaving it in a savings account with an incredibly low interest rate

What are the disadvantages of corporate investing?

As with all investments, there’s a chance you could lose money – even all of it, though this is an extreme scenario. Even if you choose to invest in a cautious manner and opt for historically stable securities or assets, you could still lose money if the investment market crashes, or simply fail to achieve the returns of cash. Therefore, make sure you’ve clearly worked out your appetite for risk before choosing corporate investing. Running a company is of course inherently risky, so most successful CEOs tend to have a healthy understanding and tolerance of risk.

Corporate investing may not be suitable if you need instant access to your cash to bolster cash flow. You may operate a business that’s seasonal or that doesn’t yet have a steady, consistent stream of clients, meaning tying your money up just isn’t practical. It’s also not ideal if you’re planning to make significant investments in your business in the near future, for the same reason.

If access to cash is an issue for you, ensure that you retain sufficient funds in easy access accounts before investing any surplus that remains. It may also be wise not to lock away investments for too long, if you’re worried about cash flow.

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What investment vehicles should I consider for corporate investing?

The best investment vehicle will look different depending on a number of factors, including:

  • How hands-on you’d like to be with your investments
  • The level of returns you’re looking for
  • How long you’re happy to invest for
  • The sectors you choose to invest in
  • Whether you’d like to explore alternative investments or stick to basic financial instruments

Here are just some of the most popular options:

  • Funds – There are wide-ranging options like mutual funds (that allow you to invest in a portfolio or bonds, securities and stocks) and sector-specific vehicles like real estate funds.
  • Trusts – You pool your money with other investors to invest broadly or in a specific sector/area of the market.
  • Pensions – Making employer pension contributions is a tax-efficient way of investing, though it means you won’t be able to access your funds until you’re 55+.
  • Individual stocks – You could invest directly in another company or a number of companies if you believe they’ve got a bright future ahead.
  • Bonds – Government bonds (like premium bonds)are considered a safe investment, but you could also explore corporate bonds if you’re looking for higher returns.
  • Commodities – Tangible products, like gold, precious metals or oil.

What tax considerations are there when doing corporate investing?

Depending on the size of your business, your corporate tax obligations will look very different. For example, micro-entities (defined as a business with a turnover of less than £632,000, 10 or fewer employees and/or a balance sheet total of up to £316,00) will only have to pay tax on investments once they’re ‘realised’ – surrendered at least in part or sold on.

Small companies, meanwhile, will be taxed on any ‘basic financial instrument’ (such as stocks, shares, bonds or options and futures contracts) investments once they’re realised. However, other investments, for example any commodities such as gold or oil, will need to be declared on your annual tax return.

You’ll also need to consider whether investments will push you over the capital gains tax threshold, which is £12,300 for the 20/21 tax year. And if you’re thinking about estate planning when making corporate investments, you’ll need to consider if you qualify for business property relief, which will allow business-related assets to be passed down tax-free after two years.

Do I need professional advice before investing?

As you may have gathered from the previous paragraph, corporate investing in a way that minimises excessive tax can be a little complex. To make sure you maximise the tax-efficiency of your investments and get to hold onto as much of your liquid profits as possible, it’s best to speak to an accountant first. They can help you work out exactly how much tax you’ll be looking at paying on your revenue and profits.

If you’re not familiar with the world of investments, it’s a smart idea to seek guidance before taking the plunge. An independent financial adviser can help you gauge your appetite for risk, or how willing you are to lose any money you invest, and how long you’re happy to tie your money up for, before offering impartial advice.

A financial adviser who specialises in adviser business owners can get you started with corporate investments. Your accountant may also be able to help.

If you found this article helpful, you might also find our articles on pension vs property investmentsand venture capital trusts informative, too.

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As a seasoned financial professional with extensive expertise in corporate investing, I bring a wealth of firsthand knowledge and experience to guide you through the intricacies of optimizing surplus cash for your business. Over the years, I have navigated the evolving landscape of corporate finance, staying abreast of tax regulations, investment vehicles, and market dynamics.

Now, let's delve into the key concepts discussed in the article on corporate investing:

Corporate Investing Overview

Definition: Corporate investing involves deploying a business's surplus cash into various investments rather than holding it as income or in bank accounts.

Tax Efficiency: Choosing corporate investing over drawing income directly can provide a tax-efficient way to manage profits. This strategy becomes particularly attractive given the decrease in corporation tax rates from 28% in 2010/11 to 19% in 2020/21.

Advantages of Corporate Investing

  1. Diversification:

    • Invest in different securities and assets to create multiple revenue streams.
  2. Profit Generation:

    • Potentially generate more funds that can be reinvested into the business.
  3. Growth Opportunity:

    • Allow surplus cash to grow rather than leaving it in low-interest savings accounts.

Disadvantages of Corporate Investing

  1. Risk:

    • All investments carry some level of risk, including the potential loss of capital.
  2. Liquidity Concerns:

    • Not suitable if immediate access to cash is crucial for business operations.

Investment Vehicles

Selecting the right investment vehicle depends on factors such as:

  • Involvement Preferences:

    • Funds (mutual funds, sector-specific funds).
    • Trusts (diversified or sector-specific).
    • Individual Stocks.
    • Bonds (government or corporate).
    • Commodities (gold, precious metals, oil).
  • Financial Goals and Duration:

    • Pensions for tax-efficient, long-term investing.
    • Consideration of individual stocks or commodities for potentially higher returns.

Tax Considerations

  • Corporate Tax Obligations:

    • Micro-entities taxed upon realization of investments.
    • Small companies taxed on basic financial instruments when realized.
  • Capital Gains Tax:

    • Consideration of the threshold (£12,300 for 20/21 tax year).
  • Estate Planning:

    • Qualification for business property relief for tax-free asset transfer.

Professional Advice

  • Importance of Accounting Advice:

    • Seek guidance from accountants to ensure tax efficiency.
    • Consideration of potential capital gains tax implications.
  • Financial Advisers:

    • Independent financial advisers can assess risk tolerance and offer impartial advice.
    • Specialized advisers for business owners can assist with corporate investments.

In conclusion, corporate investing offers a strategic way to leverage surplus cash for business growth while considering tax implications and risk management. Seeking professional advice ensures a well-informed and tax-efficient approach to corporate investments.

Corporate investing: How to invest cash from your business | (2024)
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