Ways of accessing income from a business are taxed differently
Accessing the income from investment in a business is generally straightforward if you are unconnected to the business in which you have invested. The options available become more complicated when you are the owner-manager of the business of which you want to access the income.
For an unconnected business: Where you have made a loan to the business, either directly or through purchasing a debenture, you will receive interest payments which, if made by a company, may have had basic rate tax already deducted from them. This interest income will be taxable and any additional tax payable (or excess deducted tax reclaimed) through your self-assessment tax return (SATR) each year. The loan capital is recovered by the loan being repaid or assigned, or through selling the debenture, which could result in a capital gain or loss, again, dealt with through your SATR.
Where you have made an equity investment (shares), you may be paid a dividend out of profits on each share. If a dividend is not paid, then the retained profits should increase the value of the shares. The profit can therefore be accessed by selling the shares for the increased value, resulting in a capital gain. The dividends and gains from shares are also charged to income tax or capital gains tax (CGT) through your SATR.
Accessing income from a business where you are the owner manager gives far greater flexibility. You can receive a salary and a dividend, and income can even be put into a pension fund on your behalf so as to provide for your retirement. When you access the capital value of your business, you may qualify for CGT relief, reducing the tax payable.
If you would like more information regarding investing in business, and accessing the income from a business please contact Tax Innovations on 01962 856 990 or firstname.lastname@example.org.