With the stronger economy over the last number of years, increasing numbers of companies have strengthened their balance sheets, building up surplus cash. However, this positive outcome has created a dilemma for businesses, as the cash is more than likely sitting on deposit earning virtually zero interest.

Protecting company money is important, but it’s also critical to ensure that long-term surplus cash works as hard as possible to maximise returns within an acceptable level of risk.

More and more companies are looking beyond deposits to invest their surplus cash. Investing in funds can be an appealing proposition, as it provides the opportunity to achieve potentially higher, as well as more tax-efficient returns. The innovation in investment solutions in recent years means that the choice of funds has never been more attractive for individuals and corporates.

Taxation of Corporate Investments

Most Irish resident companies are ‘close’ companies. This is a company that is

•  Controlled by five or fewer participators, or
•  Controlled by any number of participators who are directors
•  On distribution of its full income, more than 50% goes to five or fewer participators, or to participators who are directors.

Close companies can face a potential 20% surcharge if their non-trading income (such as investment income and property rental) is not distributed within 18 months of the end of the accounting period.

In Association with

This means that companies with money on deposit can be subject to both corporation tax as well as the close company surcharge on any undistributed deposit interest. This adds up to an effective tax rate of 40%.

Using A Life Assurance Structure Is More Tax Efficient

By choosing to invest long-term funds in a life assurance structure, close companies can avoid the surcharge tax, as the investment return is treated as a capital gain and not as income. So for long-term investments, company owners have the opportunity to invest in a more tax-efficient structure with potential for higher returns.

• By investing in a life policy, the company can be exempt from the close company surcharge on any gains, as the returns are not treated as income in the company accounts, as long as the funds remain invested in the bond.
• The tax rate on the return for companies is currently 25% (tax is deducted at source in the form of exit tax when gains are realised - and this should be the final tax liability).
• Company money can avail of the attractive gross roll-up mechanism of life assurance funds, with the growth being compounded over time. No tax is deducted from the policy, until either a withdrawal is made, the policy is cashed in, or the investment is held for eight years.
• The choice of investments is comprehensive ranging from low risk options such as cash funds, as well as absolute return and multi asset funds, and the higher risk equity funds.

Investment Funds

There are hundreds of funds to choose from and each investment has its own approach, with different levels of risk and reward, so it’s important to choose funds with a level of risk that’s right for your business.

Liquidity

The majority of investment funds are priced on a daily basis, so even though funds are long-term investments, they provide the flexibility of being able to switch or withdraw monies on a daily basis, an important consideration when it comes to company monies.

Multi Asset Diversification

Multi-asset funds make investing easier because clients can select from a selection of funds depending on their attitude to risk. For example, the Standard Life MyFolio funds are multi-asset funds, meaning they are diversified across assets and countries around the world.

Each fund holds a combination of lower-risk defensive assets, such as money market instruments and bonds, as well as higher-risk growth assets like equities and property. The lower risk funds have more defensive assets, while the higher-risk funds have a greater proportion in growth assets such as equities.

So, for companies, there are plenty of alternative and more attractive investment choices than retaining all of the company cash on deposit. Everyone is mindful of the risks they’re taking with their money, but with careful consideration, companies can choose investments where their money has the potential to work for them, as well as potentially reducing their tax liability.

Please talk to your financial adviser for more information.

Warning: The value of your investment may go down as well as up.
Warning: This investment may be affected by changes in currency exchange rates.

+ Brendan Barr is Head of Investment Solutions at Standard Life