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UK company-owned investments

This article outlines how returns will be taxed for collectives, UK life assurance, offshore life assurance or an offshore capital redemption contract when purchased by a UK company.

Background

The loan relationship rules were extended in the Finance Act 2008 to include life assurance policies. The loan relationship rules already impacted capital redemption policies, debt instruments (such as bank accounts), and collective investments where the underlying investment was more than 60% invested in debt­based stock (cash deposit, fixed interest or Government stock for instance). 

This means that where a company owns an investment, subject to the accounting principles of the company (see below), it would suffer corporation tax on an annual basis (ie not benefit from a gross roll­up) on profits, gains and losses arising on a year on year basis.

Income however would be taxable on an arising basis and subject to corporation tax at the company’s appropriate rate.

With effect from 1 January 2016 new accounting standards were introduced for Small Companies.  This has seen the move from accounting on a historic cost basis to accounting on fair value with the introduction of a Small companies regime under FRS102. 

The changes have also introduced the concept of a micro-entity with an accounting regime for companies small enough to meet this definition under FRS 105. 

In order to be a micro-entity the company must meet at least two of the following:

  • Turnover up to £632,000
  • Balance sheet total max £312,000
  • Max no of employees 10

UK company accounting practice

The two principal accounting practices are fair value and historic cost.

Accounting basis – Fair value

Under this method, any increase in the investment over each accounting period will be taxed as a non­trading credit and corporation tax will be due if there is a gain. 

Accounting basis – Historic cost 

Under this method, there is no increase year on year within the accounts. Corporation tax is only levied when part or all of the investment is realised. For historic cost basis to apply, a company would now need to satisfy the new micro-entities regime under FRS 105.

Where a UK company owns a collective, UK life assurance, offshore life assurance or a redemption policy, corporation tax will broadly apply as follows:

Fair value accounting basis

Collectives Collectives UK Life Assurance Offshore Life or Redemptions
60%+ invested in debt/fixed interest etc 40%+ invested in equities No distinction No distinction
Loan relationship rules apply Loan relationship rules do not apply Loan relationship rules apply Loan relationship rules apply
Corporation tax on increase year on year. Corporation tax only levied on realisation of asset. Corporation tax on increase year on year. Corporation tax on increase year on year.
    Tax credit for life fund taxation available on final encashment. Indexation also available inside the life funds. No life fund taxation.
'Income' taxed on arising basis. 'Income' taxed on arising basis. 'Income' taxed within life fund and no further liability to the company until eccashment. 'Income' not taxed until encashment.
Withholding taxes may apply.

 

Historic cost basis

Where the historic cost basis applies, investments will generally only be taxed on realisation of part or all of the investment (i.e. withdrawal, encashment, and disposal). The investment criteria outlined for collectives above would also not apply.

Summary

Establishing the accounting basis of the company is the major influencing factor when looking at corporate investments. Understanding how and when corporation tax may become payable will also help shape the asset mix within the investment portfolio and exit strategies for the company.

Following the extension to the Loan relationship rules in 2008 the opportunity for ‘gross roll­up and tax deferment’ for company investments has significantly reduced.  In addition, the changes to the accounting practices with effect from 1 January 2016 have brought more corporate investors into the fair value accounting basis for investments and this will impact their investment decisions.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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