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FRIDAY FEATURE: How to Invest Tax Efficiently in a New Business

If you are in the process of starting a new dental or medical business, it helps to know from the start the best way to structure it for current and future tax efficiency. Also, if you are looking to expand your business these rules apply too – is it more beneficial for tax to use your own cash savings, or to fund the investment from an existing business?


The views expressed in this article are specifically those of Lansdell & Rose Accountants. 


Tax efficiency for a new business venture

Starting a new business almost always holds an element of risk, however by making the best of the tax situation means that even if something goes wrong you won’t stand to be stung by the taxman too.

Getting the tax right requires you to work out the form of your investment from the beginning, which is sometimes the tricky bit as new business ventures tend to have some elements that are not all figured out yet.

The most effective way to ensure your investment is tax efficient is to carefully consider the pros and cons of each investment method.

Here we look at the most common options:

OPTION 1: Investing in shares from your own personal cash

Using your own savings to purchase shares in a company has a number of pros and cons. (This applies if you are investing in any company too).

Pros:

Investing in shares means you can receive your money in dividends, which is generally the most tax efficient way to draw income.

Also, if the company doesn’t succeed, and you make a loss on your investment, you can usually claim a tax deduction against other capital gains, or against other income. This is applicable only if there is an overall gain when you sell the shares.

Cons:

Even though dividends are the most tax efficient way to draw money, if the company doesn’t make profit it can’t pay dividends. What is the viability of the investment, and how soon would you need a return?


OPTION 2: Investing by loaning the money from your personal savings

Another option is to loan the company the money. Pros and cons of this option are as follows:

Pros:

With a loan it is perfectly reasonable to charge interest, which means you will gain income even if the company is not making a profit.

If the interest received is less than £1,000, if you pay tax at basic rate, or £500, if you are a higher rate tax payer, then you are not taxed.

The company will also get tax relief for the loan interest is pays out each month.

Cons:

If interest income is above £1,000 or £500, respectively, then you will be taxed at the top rate of tax, which is 45 percent.

As a creditor of the company, rather than a shareholder, if the business fails you can only offset your capital gains tax loss against other capital gains, not against income.

If you don’t sell any other assets in the set period, then your loss will really be lost, without the scope for a tax deduction.


OPTION 3: Investing in shares using your companies’ cash

The third option is to invest in the new business using cash from your own company.

Pros:

If your company receives dividends from the other company, then as the receiver they are exempt from tax.

In addition, if the new company makes a gain when it sells the shares, providing your company owns more than 10 percent of the shareholding, makes the gain also tax exempt.


OPTION 4: Investing by loaning the money from your company

The final option is that your company lends money to the new company.

Pros:

As the rate of corporation tax is much lower, just 19 percent, this is the rate applied to any interest earned by your company.

Secondly, if the new company fails, your company is able to deduct the loss from it’s trading profit. This means your company will get a reduction in corporation tax for the loss, compared to the personal loan option which relies on a capital gain offset.


Conclusion

Investing in a new business requires careful tax planning and it isn’t the case of one size fits all.

Based on these options, the decision sways towards investing via your company, as there are greater tax advantages. However, there is still the option of working out whether a loan or shareholding is the best route for you.

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FINAL TIP:

One option could be to invest via a company loan initially, with the option to convert the investment to shares in a set period of time. This allows you to maximise tax relief whilst the new company is growing, and going through the most risky period, to then reap other rewards once the company has established itself.


Dental & Medical Financial Services work alongside many healthcare specialists to give you access to the best advice.

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