Give us your details and we’ll be in touch asap

Insights

All Articles

Business Services

Business Tax

Personal tax

Probate and Inheritance Tax

VAT

business finance  •  Business Services  •  Business Tax  •  eis  •  Personal tax  •  Small Business

Loans vs shares? – Navigate the tax implications of investing in a business

By Simon Paterson on 19 February 2015

Setting up your own company involves financial investment and many clients ask us whether this is best done by investing in shares in the company, or by making a loan to the company. There are pros and cons to each route; these will also depend on whether it is your own company, or one you are investing in as an outside investor.

This blog explains the pros and cons of each route and the tax implications of investing in a business, summarising what you need to know to make an informed decision.

Tax implications of investing in shares

Pros

  • This can help to make a company look well capitalised by increasing the share capital – which is potentially significant in the event of future exit planning or attracting additional investors;
  • If you have borrowed money to purchase shares in a close company (i.e. one which has shareholders of 5 or fewer people or is controlled by its employees) which is a trading company, you can claim tax relief on interest paid on the loan, subject to certain restrictions;
  • If the company is a qualifying EIS company, subscribing for shares provides an opportunity to claim EIS income tax relief on a maximum investment of £1,000,000 and for a maximum shareholding of 30%; any growth in value of the shares can also be free of capital gains tax;
  • There is a potential to ‘roll-over’ any other capital gains into EIS qualifying shares;
  • The shares may give rise to dividend payments.

Cons

  • Getting your money out again may not be easy and relies on a sale of your shares. The buyer could be the company itself if you eventually wish to leave; it could be other new or existing shareholders; or you may sell your shares as part of a trade sale of the company as a whole;
  • What if the investment is unsuccessful? If the company is a close trading company you can claim capital loss relief. In certain circumstances, and subject to certain restrictions, it may be possible to offset the loss against other taxable income, which can make it less painful.

 

Tax implications of making a loan to a company

Pros

  • This option can be more flexible because the loan can be withdrawn at any time if the company no longer needs it, subject to the agreement of the directors;
  • There may be the potential to earn interest on a loan depending on the terms of your loan agreement with the company. Any interest received will be subject to a 20% withholding tax and should be declared as part of your total income on your self assessment tax return.

Cons

  • No tax reliefs can be claimed compared with the potential to claim EIS relief on a share investment. If you have borrowed money to make a loan to a close trading company, tax relief can be claimed on the loan interest paid, subject to certain restrictions;
  • If the company gets into difficulties you may not be able to recover your loan. If the loan becomes irrecoverable, you can claim capital loss relief if the company is a close trading company. However this loss can only be used to offset against capital gains in the same year or future years;
  • Making a loan to a company does not provide an opportunity to participate in the growth of the company in the same way that investment in shares does.

In summary, whilst a loan provides more flexibility, share investment can provide more tax saving potential, and opportunity for growth.

If you would like more information about the pros and cons of EIS and attracting additional business investment, please contact Simon Paterson at sp@rjp.co.uk

Read more articles like this

More help coming but not quite yet…Chancellor’s Spring Statement 2022

Update for employers: Will you be eligible for the Covid-19 Job Retention Bonus?

Covid Business Support: How could you benefit from the Winter Economy Plan?

Update on Bounce Back Loan Scheme – BBLS

Furlough scheme portal launches for beta testing

Share this:

All Articles

Business Services

Business Tax

Personal tax

Probate and Inheritance Tax

VAT

Image

60 Day Deadline for CGT Returns and Tax Payments

If you sell a property and incur capital gains tax on the transaction, you will need to file a tax return and also pay any tax that is due within 60 days of completion, or penalties will arise. Need help with your property taxes? Talk to us.

Setting up your own company involves financial investment and many clients ask us whether this is best done by investing in shares in the company, or by making a loan to the company. There are pros and cons to each route; these will also depend on whether it is your own company, or one you are investing in as an outside investor.

This blog explains the pros and cons of each route and the tax implications of investing in a business, summarising what you need to know to make an informed decision.

Tax implications of investing in shares

Pros

  • This can help to make a company look well capitalised by increasing the share capital – which is potentially significant in the event of future exit planning or attracting additional investors;
  • If you have borrowed money to purchase shares in a close company (i.e. one which has shareholders of 5 or fewer people or is controlled by its employees) which is a trading company, you can claim tax relief on interest paid on the loan, subject to certain restrictions;
  • If the company is a qualifying EIS company, subscribing for shares provides an opportunity to claim EIS income tax relief on a maximum investment of £1,000,000 and for a maximum shareholding of 30%; any growth in value of the shares can also be free of capital gains tax;
  • There is a potential to ‘roll-over’ any other capital gains into EIS qualifying shares;
  • The shares may give rise to dividend payments.

Cons

  • Getting your money out again may not be easy and relies on a sale of your shares. The buyer could be the company itself if you eventually wish to leave; it could be other new or existing shareholders; or you may sell your shares as part of a trade sale of the company as a whole;
  • What if the investment is unsuccessful? If the company is a close trading company you can claim capital loss relief. In certain circumstances, and subject to certain restrictions, it may be possible to offset the loss against other taxable income, which can make it less painful.

 

Tax implications of making a loan to a company

Pros

  • This option can be more flexible because the loan can be withdrawn at any time if the company no longer needs it, subject to the agreement of the directors;
  • There may be the potential to earn interest on a loan depending on the terms of your loan agreement with the company. Any interest received will be subject to a 20% withholding tax and should be declared as part of your total income on your self assessment tax return.

Cons

  • No tax reliefs can be claimed compared with the potential to claim EIS relief on a share investment. If you have borrowed money to make a loan to a close trading company, tax relief can be claimed on the loan interest paid, subject to certain restrictions;
  • If the company gets into difficulties you may not be able to recover your loan. If the loan becomes irrecoverable, you can claim capital loss relief if the company is a close trading company. However this loss can only be used to offset against capital gains in the same year or future years;
  • Making a loan to a company does not provide an opportunity to participate in the growth of the company in the same way that investment in shares does.

In summary, whilst a loan provides more flexibility, share investment can provide more tax saving potential, and opportunity for growth.

If you would like more information about the pros and cons of EIS and attracting additional business investment, please contact Simon Paterson at sp@rjp.co.uk