Q: I'm a shared director of a limited company and receive dividends. I'm investing a small amount into a friend's business to get it off the ground and will have a share in this also. What would be the best formation route of second company and how would this affect my tax?
Feb 26 2011
Answered by: Clive Lewis Ask a question
Firstly, you can do as you have done in the first company you mention and use your investment in your friend’s business to buy shares in a limited company. As with the first company this will entitle you to vote at shareholders meetings and to receive dividends. It would be a good idea to prepare a shareholders agreement specifying the conditions under which dividends are payable, etc. Dividends from UK companies are deemed to have had 10 per cent income tax deducted.
An alternative is to form a partnership with your friend and to share the profits and losses according to a predetermined share. It would be wise to have a written partnership agreement so that, in the event of disputes, you have evidence of what was agreed.
Finally you might suggest the 'investment' in the second business is treated as a loan and you receive a rate of interest. Again a written agreement regarding the terms of the loan would be essential. Interest on the loan would be subject to a deduction of income tax.
Obviously your friend has to agree with whichever format you suggest for your 'investment'.
You ask what impact your investment will have on your tax situation. This depends on your other income. Dividends are treated as taxed at 10 per cent up to taxable income of £37,400 (net of the personal allowance) and the higher rate dividend band is 32.5 per cent so any dividends at the higher rate band attract an additional tax of 22.5 per cent. If you take the income from the second firm as a partnership share of profits you will be taxed according to your total income. If however you take a dividend from the second investment and it takes your total income into higher rates there will be the additional tax to pay.
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