Do you (or if you are an accountant, your clients) have surplus cash in Limited Companies? If so, I hope this article is of use in your planning.
Having a healthy bank balance is nirvana for most companies and keeping assets available is always a good idea, especially in turbulent times such as these. But, could that nirvana turn into a nightmare for them? Yes.
There are many reasons why companies want to keep cash in their companies:
- They want a war chest to give them peace of mind in case the company hits trouble but it has simply grown too big.
- They may want to buy more premises in the future and/or Another business (and have been saying this for many, many years!)
These are the most common reasons we hear for companies keeping high levels of cash on their balance sheet. However, this can cause potential issues down the line, such as:
- If Directors keep far too much cash in the company which is not being utilised (at all) in the day to day running of the business, then they could be in danger of potentially losing their trading status and be deemed as an investment company. If this happens then they could end up losing their Entrepreneur’s Relief (ER) when they sell the business and double their capital gains tax bill!
- Cash in a company (again here I mean lazy cash which isn’t in operational use) could be treated as an excepted asset by HMRC on death and as such will not benefit from Business Relief (BR). This means if the business owner died then Inheritance Tax (IHT) would be payable on this cash/excepted asset even if the rest of the company did qualify
- Due to such miserable interest rates, the cash sat on deposit won’t even be keeping up with inflation, never mind growing, and so companies are losing the buying power on this money as time goes by.
What can be done?
There are many options available to these companies to potentially reduce/avoid the potential pitfalls mentioned above, assuming they haven’t found another business to invest into yet, or other ways to spend the money in the business. The four main options are:
- Move that surplus cash out of the company via a pension (if applicable and desired). Cornwall Finance & Investment Services Ltd Love pensions, but access is restricted especially if Directors are young.
- Take extra dividends, suffer the tax, then invest elsewhere in their own (business owners’) name. But what if the company needs the cash.
- Take an extra dividend, suffer the tax but invest it into an EIS or VCT and get 30% of the tax back again (often referred to as a 4–5 year exit strategy of getting money out of a business tax-efficiently). High risk / reward strategy.
- Keep the money WITHIN the realms of the business but have the money TRADING in another qualifying business, such as a lending business.
Let’s explore this last point as many company directors really don’t want to take the money from the business for those reasons we have already stated. But, unfortunately, they may never find those premises or another business, or indeed hit troubled times and, if they die or come to sell the business, they could be facing those challenges already mentioned.
Services such as the Blackfinch Corporate Management Service has been set up specifically for the purpose of allowing companies the opportunity to use their excess cash, as a TRADE, within a lending business. In order to qualify as a trade, the loans must be short term in nature (less than 2 years) with the expectation of them being re-cycled over time. By utilising this cash in another trade, assuming that they will be a trading and BR qualifying company at the time of sale or death, then taking the example of the Blackfinch Corporate Management Service it could potentially help with:
- Making their money work harder for them as the target return (net of Blackfinch’s fees) is a very handsome and competitive 4–7%p.a. Of course, this is not guaranteed but is an expected target return. Blackfinch charge an Annual Management Fee of 0.5% +VAT and will only take this after your agreed target return has been achieved
- Accessibility: this is one of the biggest advantages in case those premises do come up for sale or that fabulous business opportunity arises or, if they do indeed hit troubled times
- Receiving 100% IHT relief though BR as it is now being used in a trade rather than sat as idle cash.
- Not endangering their trading status, as again, this is now also trading alongside their main business to try and maximise the likelihood of Her Majesty’s Revenue and Customs (HMRC) granting ER at 10% when they sell.
This article is intended only as a snapshot of this area of Corporate Financial Planning. It is a complicated area and needs much careful discussion and planning. We will naturally need the assistance of the company Chartered Accountant, whom we will be happy to meet freely, for preliminary discussions.
Cornwall Finance & Investment Services treat all clients as individuals and our financial plans are built around their unique circumstances, wishes and needs.
WE ARE GRATEFUL FOR THE ASSISTANCE IN PREPARING THIS ARTICLE OF DOMINIQUE BUTTERS, SENIOR BUSINESS EXECUTIVE, BLACKFINCH INVESTMENTS LIMITED (BLACKFINCH)