Small company clients’ surplus cash options – Q&A

2 July 2024

Graeme Robb of the M&G Wealth technical team, looks at the options for small companies who may hold surplus cash on their balance sheets and how it can be invested to benefit from stock market rises without suffering the full effects of any downsides.

Companies commonly hold cash on the balance sheet that is surplus to working capital requirements. This surplus may be earmarked to fund a future business project or it may simply be a cash buffer to help weather the economic climate. Company stakeholders often seek a better medium to long term return for that surplus cash than can be achieved by holding it in cash. UK and Offshore Investment bonds offer an investment vehicle for corporate money.

With a bond wrapper, the company stakeholders can enjoy multi asset investments with a smoothing process to protect them from short term volatility. They will not benefit from the full upside of any stock market rises, but crucially they will not suffer from the full effects of any downsides. For directors acting as custodians of shareholder funds, this peace of mind can be invaluable.

Here are five common questions and answers.

  1. How is an investment bond taxed inside a company?

The chargeable event rules applicable to individuals, trustees and personal representatives don’t apply to companies (so, no 5% rule). Instead, the ‘loan relationship’ rules apply which have a much wider remit than just investment bonds. Although complex, in broad terms, the rules require the taxation treatment of the item in question (i.e. the Bond) to follow the accounting treatment. There are different accounting standards that a company might use but typically, ‘micro entities’ will use historic cost accounting with larger companies using fair value rules.

  1. What is a micro entity?

A company qualifies as a micro entity if it doesn’t exceed two or more of the following criteria:

Turnover: £632,000
Balance Sheet total: £316,000
Number of employees: 10

The accounting method should be clear from the accounts, and the accountant can, of course, confirm.

  1. How does a micro entity account for an insurance bond?

The bond is simply shown in the balance sheet at the end of each accounting period at original premium amount, regardless of the actual surrender value. No annual gain (or loss) is recognised in the accounts, meaning no corporation tax consequences arise because the tax treatment follows the accounting treatment. The company achieves tax deferral until there is a disposal event such as full surrender, part surrender or death of last life assured.

  1. How does a larger, non-micro company account for an Insurance Bond?

The Balance Sheet at the end of the accounting period includes the bond at its surrender value. Accordingly, the movement in value (gain or loss) has been processed through the Profit and Loss Account. That movement has tax consequences. There is no tax deferral since the increase in value is subject to corporation tax (any decrease is potentially relievable).

  1. If a company invests Onshore, does the Onshore Bond ‘tax credit’ apply?


The company is treated as having paid 20% tax on the gain arising on a disposal event. In practice the effective rate of tax within the life fund will be lower – bear in mind that dividends received within the fund are tax exempt. The 20% deemed paid can be set against the company’s corporation tax liability for the accounting period in question. This does not apply to annual gains arising on Onshore Bonds for companies using fair value accounting. However, the above rule does reflect the earlier gain by allowing subsequent relief when there is a disposal event.

Where the 20% tax credit on a disposal event exceeds the company’s tax liability, the excess is not repayable or offsetable in any other accounting period. If the tax credit is lower than the corporation tax liability then further tax is payable.

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