Making Money from Shares
Share investments can derive income in two ways. Firstly, income in the form of dividends and secondly from their increase in capital value that can be realised later on. It’s possible to invest directly and hold the shares personally, but what are the implications of using a company and is there a tax advantage to be gained? 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 the best and this will depend on different factors, individual goals and circumstances. This blog highlights factors that should be considered.
Tax on Income
If the shares are held personally, you will be taxed at the applicable dividend rate where the dividends exceed £2,000. (allowance for 20/21). 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. This may automatically lead many to believe the company is the better option but it is important to remember that tax will still be payable where profits are extracted from the 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. If the income likely to be generated is substantial enough to change the nature of your company from trading to investment, you may wish to consider using a separate company to purchase the shares.
Companies will pay CT when they crystallise chargeable gains. Currently, the rate of corporation tax is 19% and this may increase in the future. Individuals pay capital gains tax (CGT), but it is difficult to make a straight comparison as the rate of CGT applicable will depend on your overall income. Gains made by an individual can be offset by the annual exemption (£12,300 for 2020/21), and could even qualify for entrepreneurs’ relief (ER) if the conditions are met per Capital Gains Manual 63975.
It is important to understand what the aims are from the investment. If it is to generate income that won’t immediately be needed, and little capital growth, using a 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”.