Cash-rich companies and inheritance tax
When a company has too much cash, it can affect its ability to be free from inheritance tax. But companies have options.
The impact of company cash on inheritance tax
Company owners often expect their company to qualify for Business Relief (BR), a tax relief which allows qualifying shares to be left to beneficiaries free from inheritance tax when the shareholder passes away.
But when an otherwise BR qualifying company has a significant cash surplus, this can reduce the value of BR or even disqualify the company from qualifying completely.
Where a company qualifies for BR but has an asset such as cash that is not being used in the business, that asset is known as an “excepted asset”.
Luckily, a company can put in place planning to retain or reinstate its BR-qualifying status.
Excepted assets and BR qualification
An “excepted asset” is one that has not been used in the company during the last two years, or which is not required for future use in the businesses trade.
Excepted assets are subject to inheritance tax, even if the shares in the company that owns them qualify for BR, meaning there is some tax to pay on the transfer of company shares when a shareholder dies, despite BR being available.
Cash held without a clear future purpose could be treated as an excepted asset, making it subject to inheritance tax when a shareholder passes away.
Options for companies looking to retain BR
Pay out spare cash as a dividend
Companies can pay out accumulated cash as a dividend. But what if directors want to plan for cash to be available within the company in the future? And what if shareholders will need to undertake inheritance tax planning with the dividend they receive?
Deploy the cash in a new trade of its own
A significant cash surplus could be used by a company to participate in a new trade. But what if the directors don’t see any suitable opportunities? What if the directors are looking to wind down the company?
Invest in another BR-qualifying company
A company can use its surplus cash to invest in another qualifying business. But unless the company owned more than half of this business, this would be treated as an investment for BR purposes and fail to meet the criteria for qualification.
Join a BR-qualifying trading partnership
The company could become a member of a trading partnership which carries out a BR-qualifying trade. The company’s capital will be pooled with the other members capital and be put to work, entitling the company to a share of any profits the partnership makes. Provided a shareholder in the company has owned their shares for more than two years, and that company itself qualifies for BR, the cash contributed to the trading partnership should immediately cease to be an excepted asset, providing an immediate inheritance tax benefit.
Risks of joining a BR-qualifying trading partnership
Capital at risk
The value of an investment, and any income from it, can fall as well as rise and investors may not get back the full amount they put in.
Tax relief can’t be guaranteed
Our solutions are based on current tax legislation which could change. Tax relief depends on the companies we invest in maintaining BR-qualifying status. Treatment depends on individual circumstances.
The investment may be volatile and harder to exit
Investments in Limited Liability Partnerships (LLPs) or unquoted investments are likely to have higher volatility risk than shares quoted on the main market of the London Stock Exchange. LLPs may also be harder to exit and an investment in an LLP would likely be an Unregulated Collective Investment Scheme.
BR is assessed on a case-by-case basis
We cannot guarantee that the investments we make will qualify for BR in every case in the future. HMRC will only conduct a BR assessment after the death of an investor, to confirm whether the companies invested in qualify for BR at that time.
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