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FRIDAY FEATURE: SMEs may lose IHT relief if too much cash in the business

This month, Independent Financial Advisor, Darren, looks at how small business owners may get into IHT trouble if they hold too much cash in their business. Read more and ensure to contact a professional as this is an area of complex tax planning.

This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice. 

Cash is king…until you have too much

Cash remains king for businesses to ensure smooth operations, which is why many small business owners focus on piling in more. However, when there is too much cash, tax issues can arise, one of which relates to business relief for Inheritance Tax (IHT) purposes, sometimes still referred to as business property relief.

Whilst income tax, corporation tax, national insurance and capital gains tax are all likely to be at the forefront of the minds of business owners, IHT generally isn’t.

This is partly because shares held in a trading company are exempt from IHT. However, they are only exempt provided you meet certain criteria, which is the bit most people don’t realise.

How does business relief work?

Business relief is available on shared held for a minimum period of two years, in an unquoted trading company.

However, excess cash can affect the trading status of the company, resulting in a partial, or sometimes complete removal of business relief.

The “excepted assets” test

When applying business relief for IHT, the share value is reduced by the amount of any “excepted” assets held in the business.

An asset would be “excepted” if it was:

  • not wholly, or mainly, used for business for two years prior
  • not required for business use in the future

This measure has been put in place to prevent business owners sheltering their personal assets from IHT by keeping them in their business.

This rule catches tangible assets such as holiday homes, it also covers excess cash reserves.

What is considered as “excess” cash?

It is a good question and with somewhat a grey line.

However, HMRC have their own process to assess whether the cash is generally being saved for future use within the business, or if it is being left there intentionally for tax avoidance.

Some businesses may keep cash reserves for seasonal peaks and troughs, or just as a precaution in uncertain times, like now in the loom of Brexit.

Assessment will be done by HMRC on death of the director to ensure that any cash reserves have a specific identifiable purpose –  a surplus cash buffer is not sufficient enough reason, unfortunately.

Therefore, given that the consequence of this can be pretty hefty, and you do stand to lose your valuable tax relief, it is always important to keep cash reserves reasonable and relevant, and document any key decisions around retaining cash reserves.

For Inheritance Tax Planning, speak to Darren

darren-scott-guinness-financial-adviserDental & Medical Financial Services have been helping doctors and dentists with tax planning for over 25 years. Call to discuss your situation with Darren to ensure you are saving the maximum tax possible.

Tel: 01403 780 770


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