If your business is in the enviable position of having strong cash reserves in the bank, it is important to consider the commercial and tax implications of this extra cash.
Large cash reserves on your balance sheet could have an impact on your company ‘trading’ status for valuable tax reliefs. For instance, you may qualify for the 10% Capital Gains Tax rate through the Business Asset Disposal Relief (previously known as Entrepreneur’s Relief), or potential Inheritance Tax (IHT) free transfers provided by Business Property Relief.
In general terms, non-trading assets on a company’s balance sheet, such as excess cash, cannot exceed or, in some instances, even be equal to the proportion of trading assets. Unless properly managed, surplus cash can lead to a business falling into a ‘non-trading’ status.
Protecting the position
Aside from distributing larger cash amounts to shareholders, or investing the cash in further trading assets or business acquisitions, it may be possible to restructure the business to protect the position on an enduring basis. Creation of a separate corporate vehicle(s), to hold surplus cash and/or other investment assets can prove highly lucrative. Careful forethought is needed, both in designing the right structure and in gaining prior HMRC approval.
If you would like to discuss the options available to you in the context of your own business, contact our Tax team on 01788 539000 or 0116 261 0061.
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