In combination with an offshore wrapper offering virtual tax-free growth, with-profits funds can offer good rates of real return.
At a time when there are so many issues relating to pension provision for which employers require advice, advisers should not overlook other areas in which they can advise corporate clients.
In particular, the corporate investment market offers a huge opportunity and a high average case size ' around £150,000. By focusing on how firms in the small and medium-sized enterprise sector (SME) can invest any surplus capital more effectively, financial advisers, in conjunction with a firm's accountant, can provide a valuable service.
The SME sector in the UK, which has grown by more than 25% in the past 20 years, includes more than two million businesses, many of which are highly profitable. As a result, extremely healthy balance sheets have been built up.
Recent research from the Conduit database shows some 150,000 firms in this sector have excess working capital of more than £100,000, with 42,000 having surplus liquid capital of more than £1m. The definition of liquid capital is money that is not integral to the daily running of the business and that can be accessed within a day or so.
A separate study by Clerical Medical carried out on more than 250 SME firms found nearly three-quarters of all businesses interviewed had either built up surplus capital without a view to a specific investment purpose or are maintaining it with a view to dealing with unforeseen circumstances. Much of this money is currently sitting in deposit accounts, earning low returns with minimal tax-efficiency.
All those interviewed were asked what their investment objectives for excess capital would be. The top priorities were clearly expressed under the headings of higher returns and security of capital, with access and flexibility the other main issues.
Responses to questions about the likelihood of investing this capital show there is plenty of scope for advisers to ensure decision-makers are aware of the full spectrum of investment options. About a quarter are keen to invest some or all of their spare capital, while 44% are unsure about what they should do, mainly because they have not considered any alternatives to deposit accounts.
Around a third of businesses are against investing surplus capital but their fears are in areas such as simplicity, security and access, all of which can be overcome if the full range of options is explored.
Before looking in detail at the investment options businesses need to consider, it is perhaps worth looking at the most cost-effective ways advisers can build up their corporate client bank.
The corporate investment market is best suited to development in tandem with any accountancy connections but it is possible to start from scratch by identifying businesses that would benefit most from advice on corporate investment options.
The internet is an extremely useful tool for acquiring this sort of information and there are a number of websites that give access to company financial information on a targeted geographical basis, such as www.icaew.uk, www.kompass.com, www.dnb.com and www.bluesheep.com.
Acquiring financial information is one thing but advisers also need to ensure they can interpret that information.
Different elements of company accounts ' the directors report and notes to the accounts as well as the profit and loss account and balance sheet ' are important and will provide the basis for approaching companies with the confidence that they are likely to be receptive to advice.
Statutory accounts, which only provide a snapshot of a company's position on a given date, need to be supplemented with more up-to-date information such as management accounts and cashflow forecasts. Once an initial meeting has taken place and a company has accepted the benefits of looking at its surplus capital, it is important to acquire this additional information to enable a detailed recommendation to be produced. This re-emphasises the benefit of working alongside accountants in this process.
When the amount of cash reserves available for investment has been identified, after meeting requirements for pension funding and working capital, the possible options can be examined in detail, ensuring clients are fully aware of all potential tax-planning points ' not just corporation and capital gains tax but also inheritance tax.
If we take the two highest priorities identified in the research ' rates of return and security ' and add in tax control, which is always close to the heart of decision- makers in business, offshore with-profits bonds can meet these criteria effectively.
It is worth considering in more detail why offshore with-profits fits the bill so well. From an investment perspective, with-profits investments offer a mix of assets, including equities, property and bonds. Because the equity proportion is usually the highest, typically 50%-70%, the higher long-term growth they have historically achieved affords the prospect of good rates of real return from the investment mix. In an offshore wrapper, this growth will of course be achieved in a virtually tax-free fund.
This investment performance is delivered to investors through the smoothing effect of annual and final bonuses. Although a market value adjuster may be applied, there are often guarantees in place, both on the initial investment and annual bonuses, in specific circumstances such as annual withdrawals up to 10%. These guarantees afford considerable security.
Because investment bonds are non-income producing assets, they offer an immediate reduction in corporation tax when compared to interest on deposits, taxed on an arising basis, because tax liability on these bonds does not arise until a chargeable event gain occurs.
As bonds such as these usually have early encashment charges, it is important money is invested for the medium to long term, although, as mentioned earlier, partial withdrawals in the first five years can usually be made without charges or MVAs being applied.
The advantages of an offshore with-profits investment are magnified if a capital redemption bond (CRB) is used, typically with a fixed term of 99 years. Normally, if a company owns a life policy, the directors will be the lives assured, which means a change of director generates extra administration and possibly a chargeable event.
With a CRB, there is no life cover and no lives assured, so it is a much simpler investment vehicle.
Two free generic guides that expand on all the topics covered in this article ' First Steps to Increasing Your Corporate Business and Corporate Investment ' are available by calling 0800 779090.
With-profits investments offer a mix of assets, including equities, property and bonds.
Because investment bonds are non-income-producing assets, they offer an immediate reduction in corporation tax.
The advantages of an offshore with-profits investment are magnified if a capital redemption bond is used.
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