Holding too much cash in your business has a number of possible implications, not only are cash returns poor and inefficient, holding significant surplus cash funds can impact on shareholders being unable to benefit from a range of important tax reliefs.

Companies holding high levels of cash may find that business owners are unable to benefit from, and are denied access to, the full range of tax reliefs that an owner of a trading business would normally have access to, including Business Relief – BR, (formerly known as business property relief – BPR).

The worst case scenario is that excess cash can affect the trading status of your business, turning it from a trading company to an investment company, which can result in Business Relief being denied. It could also reduce the value of the company that would qualify from BR by the value of the ‘excepted asset’, this is an asset that is not used wholly or mainly for business purposes in the previous two years, unless it can be shown and evidenced to HMRC that the cash is being retained for a specific and identifiable purpose. Given the importance of this point, it is highly recommended that directors retain evidence of their decisions about their intentions for the future use of cash and investments retained in the business as these may well be pivotal on rebutting any challenges made by HMRC in this area.

This could have a major impact when trying to sell or pass on a business and have significant tax implications. Employing surplus funds and putting these to use in a suitable investment vehicle that qualifies as a trading business, means shareholders can again make available BR and potentially mitigate inheritance tax (IHT). For most, if not all, business owners they will also want to retain control of the company’s assets and have a degree of liquidity, again this is something that may be facilitated.

Specialist investment vehicles targeting predictable returns above inflation, whilst adopting a defensive investment approach by investing in asset-backed offer a potential solution that many business owners may benefit from.

The use of business relief arrangements are not the only options that are available to businesses considering alternatives to cash in an effort to deliver real returns and maintain the real value of cash funds, the taxation of investment vehicles held by private limited companies has changed significantly since January 2016 and most will not fall within the definition of a “basic financial instrument” and so will be accounted for under the loan relationship rules or a fair value basis of accounting.

The exception is in the form of a collective investment where 40% or more of the fund is not invested in fixed-interest/debt based assets, which offer the opportunity to deliver tax deferral on investment growth. The value of investments can go down as well as up and it is very important that specialist corporate investment advice is sought to ensure that your company’s objectives are fully taken into consideration, that the associated investment risks are fully explained and are taken into account to ensure that your company’s financial plan is suitable. The benefits, however, could be significant. For a free initial meeting please contact Albert Goodman on 01823 286096 or email Michael Seagrove.

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