If you’re a company director with company money on deposit, you really need to be reading this.
Most Irish resident companies are “close companies”. A “close company” is controlled by 5 or fewer participators. For the most part, directors usually draw a small salary for themselves and their spouse. They normally get the company to fund a pension also. This would be considered a fairly solid and tax efficient financial planning strategy.
Thereafter however, many company directors choose not to withdraw the remaining company profits, leaving these on deposit instead.
They may do so for many reasons.
- Higher salaries may be taxed at rates of up to 52% (Income Tax, USC & PRSI), so enough of that!
- Or maybe, they want to build some cash in the company in case it’s needed, or for future expansion.
- Procrastination, because they are so busy getting on with the business of running their business.
- Or, most probably, because they just aren’t aware of any other options.
And why might this be a problem? Deposit rates are at historically low levels, with demand deposits currently ranging from as low as 0% to 0.45%. While the inflation rate is only hovering above this at the moment, it might not always be that way. Anything higher and you’re into losing money. The long-term inflation rate in Ireland 1976 to 2017 was 4.66% (tradingeconomics.com). There are other reasons though. When a company leaves money on deposit, it is subject to tax on this non-trading income. Any income arising is subject to an annual 25% Corporation Tax. In the case of “close companies” such income may be subject to a “close company surcharge”. This is an additional 20% if it remains undistributed within 18 months of the accounting period in which those profits arose.
The tax treatment for lump sum investments or regular savings in a life company investment bond, is dramatically different. Such investments policies fall within the definition of an asset in Section 532 Taxes Consolidation Act 1997. A point that’s often overlooked is that the returns here are not viewed as income. There is also no provision in TCA to charge any realised gain as income, for income tax purposes.
All gains in these investment funds accumulate on a gross basis. There is a deemed tax charge on the growth only every 8 years, or when cashed in, if earlier.
The effect of this gross role up regime is that a company can defer this tax. The tax on the growth can be pushed out until at least the 8th anniversary. This allows the company to compound investment earnings, which can be significant. Another key advantage of this corporate investment policy is that it is not viewed as income. As such, the close company surcharge should not apply. Furthermore, the profits are subject to a reduced rate of just 25% exit tax as opposed to 41% exit tax for a personal investor. As a consequence, these key tax advantages combined should also lead to an accelerated growth and final return.
So, Corporate Investments offer:
- Potential for higher returns than deposits (that wouldn’t be hard)
- Benefits from the gross roll up regime
- No close company surcharge
- A range of fund options
- Only 25% tax on growth v 41% for personal investors
- Easily diversified and accessible with no penalties.
Is it any wonder then that more and more close companies are looking at Corporate Investments?
Lifestyle Financial Planners have a wealth of experience in this area. We would be more than happy to look at your company’s situation and provide some exciting investment options. To schedule your free Discovery Meeting consultation, contact Paul today at email@example.com
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Lifestyle Financial Planners offer tax-efficient, wealth management, retirement and estate planning solutions to our clients. Paul is a Certified Financial Planner CFP® and holds a Masters Degree from UCD in Financial Services and Risk Management.
Tel: 096-75951 Mob: 086-8053755, www.lifestylefinancialplanners.ie
The information contained in this article is for general information only. It should not be used as the basis for any form of agreement or advice. We recommend readers seek separate tax and legal advice where necessary. This information does not take into account your own particular circumstances. Investment funds can fall as well as rise.
Lifestyle Financial Planners Ltd trading as Lifestyle Financial Planners is regulated by the Central Bank of Ireland