Follow up

HMRC guidance - CG63975

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Investing in shares: personally or through a company?

Making money from shares

There are two ways to make money from share investments. Firstly, from income in the form of dividends, and secondly from their increase in capital value that can be realised later on. It’s possible for your clients to invest directly and hold the shares personally, but some of them may query whether they could save tax by using a company. The tax treatment of both dividend income and capital growth is different for individuals and companies. There is no universal answer as to which option is “best”, so what do you need to consider?

Tax on income

If the shares are held personally, your client will be taxed at the applicable dividend rate where the distributions exceed the dividend allowance (£2,000 for 2018/19). As of 6 April 2016, the rates have been 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers respectively.

In contrast, most dividends received by a company are exempt from corporation tax (CT). There can be complications where the issuing company is located overseas, but we will assume it is a UK based company here.

Pro advice. This may lead your client to assume the company is the better option, but remind her that she will still be taxed when she extracts the money from her own company.

If there is no immediate need to extract the funds, and they can be allowed to accumulate, the company could be more efficient. You will need to look carefully at whether there could be issues with having a large cash balance sitting in the company.

Pro advice. If the income likely to be generated is substantial enough to change the nature of your client’s company from trading to investment, look at using a separate company to buy the shares.

Capital growth

Companies pay CT when they crystallise chargeable gains. Currently, the rate is 19%. Individuals pay capital gains tax (CGT), but it is difficult to make a straight comparison as the rate of CGT will depend on your client’s income. Gains made by an individual can be offset by the annual exemption (£11,700 for 2018/19), and could even qualify for entrepreneurs’ relief (ER) if the conditions are met per CG63975 (see Follow up ).

Pro advice. If your client is not expecting dividend income, and will acquire more than 5% of the ordinary shares, advise her to request her associate makes her a director to maximise the probability of obtaining ER.

Indexation allowance for companies was frozen as at 31 December 2017, and so will not be a factor in company investments made after that date.

Advising

To advise in a meaningful way, ask your client what she expects and hopes to achieve from the investment. If it is to generate income that won’t immediately be needed, and little capital growth, using the company is likely to be best. If there won’t be much income, personal ownership will probably lead to a lower tax charge on the capital growth. As is so often the case in tax, the answer is “it depends”.

HMRC guidance - CG63975