Investing Company Surplus cash in an investment bond

This pertains to the investment of excess cash kept by businesses in company accounts beyond their operational needs. Frequently, this money remains idle in bank accounts, yielding a very low return rate and often failing to keep up with inflation.

Company 1

This might be a finance director acting as a custodian for the shareholders money. He or she will probably be looking for a  “peace of mind” investment and the prospect of less volatile and more stable returns may be appealing.

Company 2

For instance, we have a small business like an IT contractor who has made a decent income but has been cautious and has not maximized profits. In such a scenario, there might be around £20,000 available for investment. The contractor could consider this investment with the same approach as if the funds were in their personal bank account.

Company 3

It is possible that this company has stopped operating and has transitioned into an investment firm.

This scenario is quite common. Instead of having just excess funds to invest, the entire balance sheet will be allocated to various investments.

Similar to individuals and trustees, companies also invest in OEIC/Collective Investment Accounts and investment bonds. These two types of investments are at opposite ends of the spectrum, with OEICs required to distribute income while bonds do not produce income.

Regarding bonds, the company may hold an onshore or offshore life assurance bond or an offshore capital redemption bond. If a company opts for a life assurance bond, it will be established with the company as the owner and the directors as the lives assured, meeting the insurable interest criteria for trading companies. For an investment company, a capital redemption bond without lives assured is likely to be more suitable.

How are company owned bonds taxed?

The chargeable event regime and the 5% rule do not pertain to companies. Instead, bonds are subject to taxation under the 'loan relationship' rules, which have a broader scope than just insurance bonds. According to these rules, the tax treatment of the specific item (such as an insurance bond) aligns with its accounting treatment.

What is the accounting treatment?

Accountants are required to adhere to generally accepted accounting principles, and within this framework, they will come across two sets of rules based on the company's size. This could be a very small company known as a micro entity or a larger company.

For a micro entity, Historic cost accounting can be used which means that if the bond grows in value, then that growth isn’t reflected in the accounts, and the bond isn’t revalued but instead continues to be shown at its historic cost, in other words, at its original premium. If there is no annual accounting profit, then there is no taxable profit, and the company will get tax deferral until there is a full or part disposal.

Those companies which are bigger than micro entities will record the bond under fair value accounting rules. Under these rules, the Balance Sheet at the end of the accounting period will include the bond at its surrender value at that date. That annual accounting movement has corporation tax consequences with the increase in value subject to corporation tax. Incidentally, any decrease is potentially relievable for corporation tax purposes.

With a UK bond, the underlying bond fund is subject to taxation, allowing the company to benefit from a 20% credit upon full or partial disposal. This 20% credit effectively cancels out any 19% corporation tax liability.

Where the company is using fair value accounting, the 20% credit doesn’t apply on the annual increases that previously mentioned, but only on a subsequent disposal when the 20% credit is offsetable against the company's overall corporation tax liability for the accounting period in question.

Directors need to understand that double taxation can happen on yearly gains, involving life fund tax and corporation tax paid by the investing company on the net return. Although the 'tax credit' upon disposal offsets this, if there is no tax liability overall, the benefit of the credit could be forfeited. Therefore, for companies valuing fairness and worried about inconsistent outcomes and possibly wasting a tax credit during the disposal period, an offshore bond could provide a solution.

If a fair value company owns an offshore bond, it will be subject to annual taxation based on the gross return without receiving a tax credit upon disposal. Any decrease in value during the accounting period can be used for tax relief. In the case of a micro entity investing in an offshore bond, similar to a UK bond, no annual gain or loss is recorded in the company's accounts, thus no corporation tax implications arise. When the company sells part or all of the bond and realizes a profit, the profit will be taxed at the current corporation tax rates. The choice between onshore and offshore investments will be determined by the specifics of your situation.