You’ve been offered a stake in a new venture. It will be run through a company. You’re unsure whether to buy the shares personally or invest via your company. Which is likely to be the most tax efficient?

Tax on investing in a private company

Buying ordinary shares in a company provides you with two opportunities to make money: as income (in the form of dividends) and in increased share value. If you purchase the shares personally income tax applies on dividends and capital gains tax (CGT) on increased share values. The tax position is different where you invest through your company; the dividends it receives are tax exempt and it pays corporation tax (CT) on increases in the share value.

Tax on dividends

Tax on dividends changed dramatically for individuals from 6 April 2016, but remained unaltered for companies. However, the differences are irrelevant if your company receives the dividends but passes them to you, either immediately or later.

Trap. Your company pays no tax on dividends but when it passes them to you, you’ll pay tax on them as if you had received them direct from the other company.

Tip. All the time your company retains the dividends, i.e. doesn’t pass them to you, there’s no tax payable on them. In effect they are sheltered from tax indefinitely or until your company passes them to you.

Where you own the investment shares personally you’ll only pay CGT on any growth in value when you sell them. The position is usually the same if your company owns them, i.e. it will pay CT on capital growth when it sells them.

However, different rates, reliefs and allowances apply which can make the tax bill for personal ownership very different from that payable with company ownership.

Trap. In practice it’s impossible to be certain whether personal or company ownership will result in the lowest tax bill in respect of the increased value of shares. But owning shares personally will at least avoid the double taxation which can apply with company-owned investments.

Example – personal investment. Fred uses his company to buy 1,000 shares, costing £10,000, in his friend’s company Acom Ltd. After five years Acom’s shares are worth £50,000. Ignoring CGT reliefs Acom pays CT at, say, 19%, on the £40,000 gain, i.e. £7,600. When the net amount – £32,400 – is paid to Fred (that could be immediately or many years later) he’ll have to pay personal tax on it even though he’s already been taxed. This might result in an overall tax rate of around 50%.

Income versus capital growth

The tax position for dividends favours company ownership, while personal ownership is likely to result in a lower tax bill on capital growth. Make your decision on whether you or your company should invest based on what type of return you expect – dividends or capital growth.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.