Dealing (tax efficiently) with a failing investment

A few years ago you set up a company to invest in other businesses. One of them has struggled and you’re undecided whether or not to pull the plug on your investment. If you go ahead what’s the most tax-efficient way to do it?

Investment companies

There’s more than one way in which a company can invest in another business. For example, it can simply lend it money. But if you’re sure it’s going to be successful, buying shares in it can be a better option. Not only will your company have the right to income (dividends) when it makes profits, but the value of your investment will grow with the share price. But there can be drawbacks.

Loans v shares

One disadvantage to shares is that if the business fails and is wound up, as a shareholder your company will be at the bottom of the list to be paid out. That’s a worst case scenario, but where do you stand if the business invested in flounders but stays afloat?

Making an exit

Where the shares are in an unquoted company, it isn’t easy to sell them. You’ll probably have no choice but to offer your shares to the other shareholders who’ll no doubt offer a rock bottom price. But at least your company will get something back from your investment, plus it will generate a capital gains tax loss.

Example. Your company, Acom Ltd, subscribed for 300 ordinary shares in Bcom Ltd, a trading company, for £30,000. After a good start Bcom has struggled and you want out. The other shareholders of Bcom offer to pay £10,000 for the shares leaving you with a capital gains tax (CGT) loss of £20,000 (£30,000 - £10,000). This can be used to reduce your company’s tax bill, but only in the right circumstances.

Using CGT losses

An investment company can set CGT losses against other gains it makes in the same accounting period. If there are none, or the loss exceeds the gains, the unused amount can be carried forward to set against future gains.

Tip. To obtain tax relief for the losses as soon as possible, consider selling other investments which have increased in value in the same year - perhaps quoted shares because they are easy to sell. If you don’t want to lose the investment permanently, repurchase the shares, but allow 30 days to pass or anti-avoidance rules will apply. However, there might be a better alternative.

A better way to use losses

Assuming Acom doesn’t have other gains, but has income, instead of selling shares just to make quick use of the CGT loss, it can make an election to turn it into a deduction from income (see The next step ). Say Acom’s income for the accounting year in which it sold the Bcom shares was £15,000, by making the claim it can use the loss to reduce its corporation tax bill, possibly to zero, thus saving it £3,150 (£15,000 x 21%).

Tip. When using an investment company to buy shares in a trading company, ask its directors to issue new shares which you can subscribe for, rather than buy them from existing shareholders. That way if the investment fails, your company will have the option of claiming a tax deduction against either capital gains or income.

If your investment company makes a loss from selling shares, it can be deducted from gains it makes, but this will mean selling other investments. Instead, as long as when the shares were bought they were subscribed for, i.e. newly issued, by the company, you can elect to set the loss against your company’s income.

Please give us a call if you would like further information or advice.

Dealing (tax efficiently) with a failing investment

Categories