Investing in a New Business

Q. I know someone who is intending to start a new business, selling wine both online and at a high street shop. I would like to use my limited company’s money to invest in his new business. As I’ve seen on TV, I would buy say 10% of his business for £10k. I would create his website / manage his IT. Then at some point in the future he would pay back; perhaps as dividends paid to myself / my limited company. What are options or pitfalls here? Is it just a bad idea to have one company invest in another?

A. If your company acquires a 10% shareholding in the wine company then it will be acquiring an asset & as such there will be no C.T relief for the £10K invested. This will be taken into account if & when the shares are disposed of, when calculating any capital gain/loss. The general rule for dividends paid by one UK company to another UK company out of post-tax profits are that they are exempt from further taxation.
 
If you personally invest the £10K then you could borrow this amount from the company & provided it is repaid to the company 9 months following the accounting period it is loaned to you there will be no further tax implications. Failure to do so however will result in the company paying 32.5% tax on the loan that can only be recovered once the loan is repaid & only then nine months after the end of the accounting period in which the loan repayment falls. The loan can be made interest free as loans to buy shares in a close company & loans that do not exceed £10K do not attract a benefit-in-kind. Any dividends that you receive will be taxable at either 7.5% (basic rate), 32.5% (higher rate) or 38.1% (additional rate). The first £5K of your total dividend income in a tax year is free of tax.
 
If your friend’s company’s trade qualifies, he may wish to consider establishing a Seed Enterprise Investment Scheme or Enterprise Investment Scheme to enable you to make the investment & qualify for attractive tax relief. Professional advice must be taken before doing so however as there are numerous conditions to satisfy.

1 Comment

  • Geoff says:

    I may be very out of date on this, but if one company invested in another as proposed and with the indicated working arrangements, there used to be a risk of invoking close company rules, which would increase the chance of paying large company corporation tax. As suggested, it is essential that uptodate professional advice be sought.

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