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bigduckontax
bigduckontax, Accountant
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I am looking advice relating to a UK resident

Customer Question

Hi, I am looking for specific advice relating to a UK resident making an investment in a EU based start-up company.
I am wondering whether it is better from a tax perspective if I invest in the company as an individual or through a UK company?
The start-up company is based in Finland.
Any advice would be appreciated.
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question.
If you invest personally then on disposal any gain will be subject to Capital Gains Tax (CGT). This tax is at 18% or 28% or a combination of the two rates depending on your income including the gain in the year of sale.
UK Companies are not liable to CGT at all, any gain or loss made on a disposal is passed through the trading account and exposed to Corporation Tax (CT). The rate of CT is 20%.
It thus hinges on the two options. Of course if you dispose of your UK company and make a gain then you will be liable to CGT, back to square one. It is a classical example of Benjamin Franklin's dictum that in life there are but two certainties, death and taxes. Remember that you have an Annual Exempt Amount (AEA) of 11.1K to offset any gain.
Finnish Capital Gains are taxed at 30% up to 50K Euro and 32% thereafter. Under the Double Taxation Convention between the UK and Finland the gain cannot be taxed in both jurisdictions and any tax paid in one is allowed as a tax credit against the liability in another. The Convention does not protect you from differences in the rates of taxation.
I do hope that I have been able to shed some light on your position.
Customer: replied 1 year ago.
Hi,Thanks for your reply. Do you know much about the Finnish system? I was assuming that if I invested as an individual then I would be subject to Finnish taxes in entirety on disposal, just like if you own property or company shares in the UK then you are taxed on gains/income regardless of whether you are resident or not.I was thinking that sheltering the investment in a UK company would shield me from Finnish taxes completely, but as you say introduces a number of other potential issues.Would I not be able to benefit from any entrepreneurs tax-relief? If I went the company route, the company may also trade in its own right and not just be an investment vehicle.Thanks,
Dan
Expert:  bigduckontax replied 1 year ago.
Global Property Guide tells us that:
'Nonresidents are taxed on their income from Finnish sources'
so your surmise regarding Finnish taxes appears sound. with Income Tax running at 35% and CGT slightly lower you can forget about any UK liability as the Convention will knock out any UK Income Tax or CGT through the tax credit from Finland.
Finnish Corporation Tax mirrors UK's taxation system with the same rate, 20%. Thus using an UK Company to make this investment would appear to be the more favourable option. There would also be the possibility of Entrepreneurs' Relief applying at a flat rate of 10% when the UK company is finally disposed of.
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Customer: replied 1 year ago.
Thanks, ***** *****With regard to Entrepreneurs' Relief, I believe there is a proviso that the company cannot have investments as it's main source of business. If there is a split between investments and trading, do you know what the split has to be in order to still get the relief? Also whether that split is based on revenue, volume, or time spent, or some other metric?Thanks,
Expert:  bigduckontax replied 1 year ago.
The guidance from the Gov UK web site is not helpful viz:
'the company’s main activities are in trading (rather than non-trading activities like investment)'
There is case law on this [source: Gannons Solicitors]:
'Gilbert v HMRC
In the tribunal case of Gilbert v HMRC, it was held that entrepreneurs’ relief could be claimed on the basis that the 1/9th part of the business sold did constitute a mini business in its own right – it could be run as a separate and individual business.'
It is perhaps not surprising that the Gov UK web site is a trifle opaque on this matter!
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Customer: replied 1 year ago.
Thanks,
So in that case, I assume the 1/9th part was the 'trading' part that the owner wanted to use Entrepreneurs relief for? Would you think that in a business that invests as well as trades, the relief cannot be applied to any proceeds from the investment?Thanks again for your help.
Customer: replied 1 year ago.
Hi,Sorry, I forgot to ask. If I were to proceed through a business, while no CGT is liable, as you say the CT still is, but if I wanted to extract the money from the business, could I do that entirely through dividends?If you simply close a company at the point, are the profits still paid out as dividends or through some other mechanism?I'm just thinking to get from profit on the investment to money in my pocket, the personal investment would attract 30/32% tax in Finland, but the UK company investment would attract 20% CT then a dividend rate on the profits?I'm simply trying to find the most cost effective way to realise the profits of the investment.Thanks,
Expert:  bigduckontax replied 1 year ago.
A company is not liable to CGT, but any gain made is subject to CT.
You could use dividends providing the company has free funds to meet these. Remember dividends do not count against profits for CT purposes whilst salaries do.
Why go through the palaver of closing down a company. Just sell it on eBay; you might even get some money for it.

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