Corporate Investments in Collectives


  • Many companies have cash on their balance sheet
  • Interest rates for corporate depositors are currently very low
  • Subject to satisfying the need for accessible cash a company could consider an equity based investment into collectives

Facts and analysis

Many successful private limited companies hold substantial amounts of cash in deposit accounts.  These cash deposits will not give the company any scope for capital growth and to the extent that any interest is earned it will be taxable. The existence of these funds means that there is a potential to give advice to a private company on the opportunities to achieve better and more tax efficient medium to long-term investment returns.

It is first necessary to consider some fundamental issues before we consider the opportunities for corporate investment.

  • First, it is important to check with the investing company that they will not require any access to the cash in the foreseeable future.  If they do, a medium to long term equity based investment in a collective may not be appropriate.
  • The clients in a corporate investment scenario are the directors (as “custodians” of the corporate funds) and it is important to check their attitude to risk.  If the directors are risk averse it may be better for them to stay in a cash deposit account.  On the other hand, if they want to invest with scope for capital growth over the medium to the long term an investment in a collective (with an appropriate asset allocation) may be appropriate.

Subject to satisfaction of these factors it is then worth considering whether investing in collectives would be appropriate as a means of giving a private company the opportunity to achieve better growth compared with cash over the medium to long-term.


Fund managers of UK authorised collective investments are not subject to tax on capital gains and are transparent in respect of income. Dividends paid from UK collectives are received with no tax payable by a UK corporate investor. This is true whether the dividends are actually received or reinvested.

So, a company investing in an ordinary UK equity based collective will have no year-on-year tax on dividends and will only pay CGT on real gains. Also, any dividends reinvested will increase the cost or base value of the investment for the purpose of calculating future gains.


Company A is looking to invest £100,000 in to equity portfolio producing 5% growth (assume 3% dividend and 2% capital growth). The Retail Prices Index is assumed to increase by 2.5%. After five years the return on encashment of the portfolio will be as follows:  

Return for Company A after 5 years


Original Investment


Capital Gain


Accumulated Dividend


Gross Return



·         As and when dividends are received they are accumulated without further liability

·         Capital growth of 2% is less than RPI of 2.5% therefore no tax on disposal




Net Return


If a collective qualifies for interest distribution status (ie. it is invested with more than 60 per cent in debt-based/interest-bearing securities) application of the loan relationship rules will have to be considered.


Company B invests £100,000 in to units in a cautions managed fund that pays savings interest. Assuming a 5% gross return after charges the position on encashment after five years will be as follows:

Return for Company B after 5 years


Start Year

Gross Interest

Tax at 19%*

End Year


























*Assuming Corporation Tax remains at 19% for the duration of the investment. 

Company Investments – Other Considerations

Power to invest

A company will need the power to make the investment.  It will be possible to determine this power by considering its Articles of Association.  These will normally confer wide powers which would give the company sufficient power to invest in a life assurance policy or collectives. 

The impact on Business Asset Disposal Relief (previously Entrepreneurs' Relief before 6 April 2020)

There is one other important aspect to bear in mind when advising companies on appropriate investments.  This is the impact that the investment can have on the director/shareholder’s entitlement to Business Asset Disposal Relief when they eventually sell or dispose of their shares in that company.

Business Asset Disposal Relief is a relief which means that if an employee/director, who owns at least 5% of the shares in a trading company, sells those shares he/she can enjoy up to £1 million of capital gains taxed at the rate of 10%.  The relief is cumulative which means the maximum relief an individual can have throughout his lifetime is £1 million and the relief does not apply according to each business

Business Asset Disposal Relief is given to investors in a trading company.  It is normally easy to determine whether a company is a trading company but from time to time certain investment decisions can impact on its ability to satisfy the definition. To determine a company’s status HM Revenue and Customs apply the “20% test”.  This means that provided an investment is not accounting for more than 20% of the company’s income or does not amount to more than 20% of the company’s asset value, then the investment will not prevent the company being a trading company.  It is, therefore, important to be careful when looking at corporate investments to make sure that these rules are not infringed. 

Fortunately, there would seem to be a couple of ways in which an investment could be made without having adverse implications from the standpoint of Business Asset Disposal Relief. 

First, in order to qualify for Business Asset Disposal Relief, the shares in the company must satisfy the conditions for the full year before disposal of the shares takes place. This may mean that provided any “problem” investments are realised at least a year before the sale of the shares they may not affect the director/shareholder’s ability to qualify for Business Asset Disposal Relief.

Second, it is accepted practice by HM Revenue & Customs that when undertaking an asset valuation of the company it is possible to take into account non-balance sheet values and this would include goodwill. Frequently when this is taken into account it will drive down the percentage value of any investment meaning that the 20% asset test is not infringed and Business Asset Disposal Relief is available. Again, each case will depend on its own facts and professional advice is absolutely essential.

The impact on inheritance tax business property relief

When calculating the value of business property for inheritance tax purposes (in circumstances of a lifetime transfer or death of a business owner) a reduction of either 100% or 50% can be applied. It is important to note that because the relief applies to ‘relevant business property’ some assets can be excluded. Therefore, if part of the value of the company’s shares can be linked to an ‘excepted asset’ within a business, no business property relief will be available for the share value represented by that asset. Examples of excepted assets would include:

  • Investments, eg quoted shares, collectives, gilts, investment bonds etc.
  • Large cash balances which are in excess of future business requirements.
  • Property rented to third parties.

A summary of Collectives as corporate investments

Collectives offer the following advantages as a company investment.

  • No further corporation tax charge arises on accumulated or distributed dividend income.
  • Indexation allowance is available on capital gains.
  • For investments into dividend paying collectives capital gains are only taxed when realised and at that time only real gains are taxed. This means only gains above inflation will be taxed. In addition, dividends (received or accumulated) are not subject to tax and increase the base value/cost of the investment.
  • A switch between different investment funds would trigger a disposal and so a corporation tax charge could arise at that time.
  • If the underlying investments are more than 60% invested in cash/fixed interest-based investment funds, then the loan relationship rules will mean the company suffers a tax charge on any increase in capital value, as well as a tax on income arising.

Next steps

  • Identify companies who have cash deposits that are not earmarked for use within the business in the short to medium term
  • Familiarise with the rules on:
    • the taxation of collectives for companies
    • the potential impact of investment on Business Asset Disposal Relief and inheritance tax business property relief.
  • Always ensure that companies fully understand the tax implications of an investment for their business.

Important information

This information has not been approved for use with customers and is based on Aviva’s interpretation of current law and legislation, and our understanding of HM Revenue & Customs (HMRC) practice as at 6 April 2021.  It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice.  Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients.  You should always seek appropriate legal or other professional advice.