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Tax on savings and investment income
- 1. Tax on savings and investment income
- 2. Taxation of Interest Refers to interest earned on a loan made by the individual or company. For an individual, the tax payable is income tax. (part 4 chapter 2 of ITTOIA 2005) For a company, the tax payable is corporation tax. Interest is paid gross since April 2016. Chapter 4 makes no provision for deductible expenditure. A company making a loan is treated differently depending on whether it is made in the course of trade or as an investment.
- 3. Taxation of shareholders Dividends- an individual shareholder is taxed on dividends as part of his income. share sellback- if the individual makes profit i.e. the sale price to the company is above the price of issue to the shareholder: 1. it may be treated as a dividend for income tax purposes. 2. It may be charged to CGT if the requisite conditions are met. Which tax is preferable will depend on factors such as tax band and availability of reliefs. Basic rate income taxpayer dividend rate - 7.5%, dividend allowance available. Higher rate- 32.5% Additional rate- 38.1%
- 4. Income Tax Reliefs If the individual borrows money in order to purchase ordinary shares in a close company that is trading or, borrows to lend to the company then the interest on the loan undertaken may qualify for tax relief. Income tax act 2007 ss.383, 392-395. The Enterprise Investment Scheme may also provide a deduction of up to 30% income tax relief on investments up to £1 million per tax year.(therefore £300,000 maximum)
- 5. Corporation tax on distributions Dividends- under s.1285 if a company receives dividends from shares in another UK company then as a general rule it is accounted for in corporation tax subject to broad exceptions. Profit on a sellback- will be treated as a chargeable gain if the capital gains treatment test is met, otherwise treated as income and taxed accordingly.
Editor's Notes
- A bank account is strictly speaking a debt owed by the bank to the account holder, so interest paid by the bank will be treated as interest on a loan. The ITTOIA is the Income Tax (Trading and Other Income) Act 2005. As it is paid gross, it must be included in the total income for the tax year by the lender. Although there is no deductible expenditure, lending to a close company or partnership may allow some sums to be deducted. If the loan is made in the course of company trade, income is added to the trading profit of the company and taxed accordingly. If as part of an investment, then it is charged separately depending on whether there is a non-trading credit ( essentially net profit) or deficit (net loss).
- The conditions are that: shares are not listed on a recognised stock exchange (AIM, which deals with shares in small or medium size growth companies is not a recognised exchange for these purposes.) and done to raise money to pay IHT or to benefit the trade of the company. The shares were owned by the selling shareholder for at least 5 years and the sale is of either all the shareholder shares in the company or at least substantially reduces the percentage shareholding so that it does not exceed 30% of issued share capital. (the reduction must be at least 25% for it to be deemed substantial.) As the conditions are complex, it is possible to apply to HMRC for advance clearance of the proposed tax treatment of the buyback before it takes place to ensure it will be taxed to CGT.
- The additional considerations are that the lender controls more than 5% of the ordinary share capital/assets or work for the greater part of their time in management or conduct of the company. There is also a cap of either £50,000 or 25% of the taxpayer’s total income in the relevant tax year, whichever is the higher. Eligibility for the EIS is subject to a variety of conditions for both the investor and the compant, the most common one for an investor to fall foul is that all shares must be held for at least three years from the date of issue, or the tax relief will be withdrawn. The EIS is however one of 4 venture capital schemes available.
- The broad exceptions so broad that most dividends are exempt from corporation tax. The reason being not exempting them would lead to double taxation on profits distributed by the paying company which would have already been assessed. The capital gains treatment test is the same as that used for CGT on an individual. If an individual would have been able to pay CGT on the profit because it met the conditions then the company can treat the profit as a chargeable gain instead of income.