Turning company wealth into a wider planning conversation

Why it matters

The opportunity is not simply about chasing a better return. A company investment discussion brings together tax, liquidity, investment risk, company law, and shareholder planning. Understanding the client’s objectives, and what that money may need to do in the years ahead, can help put surplus company cash to work in a more considered way. For advisers, that means considering the decision in the context of the client’s wider circumstances. How might this investment decision fit with wider plans for retirement, succession, or an eventual sale of the business? Without this planning approach, a corporate investment can create tax surprises, cashflow pressure or complications when shareholders later sell, retire or pass shares on to family. 

The attraction of a corporate life assurance contract is the gross roll-up structure. For corporate investments in a life assurance contract, the policyholder is not taxed each year on income and gains as they arise within the policy. Instead, the life company applies exit tax when a chargeable event occurs. Chargeable events include maturity, full or partial surrender, full or partial assignment, and each eighth anniversary of the policy. Revenue guidance states that the exit tax rate is 25% for corporate policyholders. The 1% government levy also applies to corporate investments.

In many respects, it works very similarly to an investment bond for an individual except for the 25% exit tax rate.

The direct investment comparison

Contrast this with direct investment by the company. Revenue states that corporation tax applies at 25% to non-trading income, including rental and investment income. In simple terms, non-trading income is income derived from activities that are not related to the core business of the company.

Take an electrical contracting company that uses company cash reserves to buy commercial property for rental income. The rental income generated would be treated as non-trading income. Normal trading income profit, by comparison, is taxed at 12.5% corporation tax in most instances.

Where the company is a close company, Revenue applies a 20% surcharge on undistributed after-tax estate and investment income, reduced where income is distributed within 18 months of the end of the accounting period. Revenue lists rental income, interest, and dividend income as examples of income subject to these rules. For many Irish SMEs, particularly family-owned or director-controlled companies, the close company surcharge is an important consideration.

While advisers do not need to be specialists in every aspect of the close company surcharge, they should understand it well enough to identify when it may apply so they can hold meaningful conversations with prospective clients.

Where a life assurance contract can help

A life policy may offer three practical advantages. First, exit tax will only happen when a chargeable event occurs rather than arising annually on gains or disposal as outlined earlier.

Secondly, the life company deducts and pays the exit tax, which may simplify administration compared with a direct portfolio of deposits, funds, dividends, and capital disposals.

Thirdly, clients can generally switch funds within the policy without triggering a chargeable event or immediate tax liability. 

None of these features make the policy automatically suitable. But in my experience, the low-maintenance nature of a corporate investment bond is attractive to company directors.

The suitability conversation

The strongest advice-led conversations start with the client’s circumstances, not the product. The fact-find should be asking whether potential funds available for investment are genuinely surplus after allowing for tax bills, wages, debt repayment, creditors, or planned reinvestment in the core business. 

From there, advisers can consider what the client needs from the investment, including the investment term and an appropriate fund choice. Deposit options within a life assurance contract are also an option particularly for shorter investment horizons.

It is common practice that there are two directors as lives assured in the policy being set up, so the policy does not automatically surrender on first death. 

A corporate investment is still an investment recommendation, so risk profiling, capacity for loss, fund selection, charges, and liquidity should all be discussed with the client.

Pensions

For most owner-directors, pension planning should be considered before a company investment. Employer pension contributions can move funds from company wealth to personal retirement wealth in a tax-efficient way. For an owner-director, these decisions rarely sit in isolation. What stays in the business, what is invested and what is directed towards retirement all need to be considered in the context of their wider life plans. A corporate investment policy is more likely to be a conversation for residual company cash after working capital, business reinvestment and pension planning have been reviewed.

Shareholder reliefs

Another question we see regularly is how a corporate investment may interact with different shareholder reliefs. 

Like having a working knowledge of the close company surcharge, a similar approach should be taken in this area.

Advisers should also be alert to future shareholder reliefs. If shareholders expect to sell the company, pass shares to the next generation or rely on retirement relief or revised entrepreneur relief, the build-up of non-trading investment assets in a trading company should be reviewed by a specialist tax adviser. The point is not that a corporate bond (or any company asset deemed a non-trading investment asset) automatically prevents relief from applying. Rather, it’s that the scale, purpose, and timing of investment assets can matter when assessing a company’s trading profile and the value attributable to trading assets. 

If retirement and/or entrepreneurial relief are on the short-term radar of your prospective client, the suitability and the amount invested in a corporate investment bond should be discussed by the client with their accountant and/or tax adviser before proceeding with any sale.

In my experience, raising these considerations early and encouraging the client to seek clarity on the above from their accountant where needed demonstrates the value of good financial advice and helps build a good client relationship from the outset.

The opportunity

For advisers, surplus company cash can be the starting point for a much broader, long-term client conversation. Understanding a client’s priorities can help advisers connect decisions about company cash with the client’s wider financial plans. That’s where the opportunity goes beyond comparing a retail bank deposit rate with a fund projection or an equivalent deposit option in a life assurance contract. It gives advisers an opportunity to understand more of the client’s circumstances, bring different planning needs together, and demonstrate the value of advice over the longer term.

Corporate investment cases can surface considerations that advisers may not encounter every day. That’s where we can offer support. Standard Life’s Retirement Solutions team supports advisers with technical expertise that they can draw on when they need it. If you need support navigating a solution for your client, contact us at retirementsolutions@standardlife.ie.

Technical source notes: This article was prepared using revenue guidance on corporation tax, life assurance exit tax and close company surcharge, plus internal Standard Life corporate investments material. Tax rules may change. This article is for adviser education only and is not legal, tax, accountancy, or investment advice.