Corporate investment

It is not always considered that companies should give thought to investing cash for specific projects in the future. The following highlights an example of what companies can do if they consistently have large sums on bank deposit accounts.

Many companies have surplus cash in bank and building society accounts, but these tend to offer poor returns and the interest is liable to Corporation Tax. An offshore investment bond can achieve an improved rate of return and has a range of tax planning advantages for the corporate investor.

Interest, which is taxable annually, can be replaced by a gain from an offshore bond, which is not taxable until a chargeable event occurs, ie: if the investment is sold.

For example, Company A invests £250,000 in an offshore investment bond. The interest this money previously earned on deposit was 3% a year, and the company paid tax on this interest at a rate of 19% a year. The Corporation Tax saving is, therefore, £1,425 a year, because tax is on an arising basis and this has been replaced with a tax deferral. Corporation Tax payable on the eventual sale may be lower if tax rates have reduced, or if losses are available. The key is you, as the company, control when you pay tax.

Company profits may fluctuate for a variety of reasons and high profits can be reduced legitimately by incurring expenses such as pension contributions. Let's look at an example when profits are low; company B's profits normally border on the marginal rate limit of £300,000, but for one year the profit is expected to drop to around £200,000. The company intends to surrender the investment bond and expects the chargeable event gain (profit) to be around £30,000.

By timing the encashment to occur in the account year of lower profit, the tax rate on the bond gain can be kept to 19%, instead of 32.75% - a tax saving of £4,125.

Year ended tax	Profit from trade	Bond gain	Tax on gain
31 March 2005	£300,000	£30,000	£9,825
31 March 2006	£200,000	£30,000	£5,700

Alternatively, Company B plans to incur some major expenditure on plant and equipment in the near future, which could turn its taxable profit into a loss. Timing the encashment of the bond to occur in the same accounting year as the company makes a trading loss, saves up to £9,825.

Year ended tax	Profit/(loss) from trade	Bond gain	Tax on gain
31 March 2005	£300,000	£30,000	£9,825
31 March 2006	£(200,000)	£30,000	£Nil

In summary, the key advantages of offshore bonds for surplus company funds are:

• control over the timing of the tax;
• the same effective tax on the fund as the UK pension schemes;
• non-income producing, so can keep profits down and reduce annual tax;
• the ability to withdraw up to 5% a year of the original investment, tax deferred. Tax only becomes payable when the investment is sold - provided no more than 5% a year is taken out, there will be no tax to pay until encashment.

With an offshore bond, a company can control its corporation tax liability whilst generating a reasonable return on assets and retaining access to its money. Offshore bonds can also be a suitable addition to pension funding.