Undoubtedly, the Covid-19 pandemic has hit many of our local businesses hard, and they are now relying on their customers supporting them as restrictions are lifted and they try to restore some sense of normal trading activity. For those businesses that were able to continue to trade through the pandemic, in particular those that diversified their product lines or adopted a brand new business idea in the midst of the crisis, they could now find they have an unanticipated problem of holding too much cash.
Shareholders may raise concerns if there is a pile of cash sitting in a bank account and earning a minimal rate of interest; perhaps the funds could be better invested elsewhere for a greater return. Excess cash can, therefore, represent lost opportunities for the business. In addition, if there are no plans to utilise the excess funds, then investors may begin to expect a greater return on their own investments in the business. Management teams may begin to get complacent around practices such as collecting debts and the former culture of a successful business can quickly change.
Excess cash on a business’ balance sheet can have unexpected consequences for those entrepreneurs who may now want to consider selling their businesses. One of the conditions for accessing Business Asset Disposal Relief (the new Entrepreneurs’ Relief) is that the business has been ‘trading’, meaning that it does not carry on other, non-trading, activities to a substantial extent (various tests have to be considered). Carrying surplus cash could be considered by HM Revenue and Customs as being more akin to an investment activity, particularly where there is no intended use set out for the cash; the consequences being twice the amount of capital gains tax payable.
Similarly, valuable tax reliefs that may be available when passing on or gifting an interest in a business to a family member may be prejudiced by excess cash held by the business. Instead of being able to pass shares in a family company to the next generation tax-free, a capital gains tax charge may, in fact, become due.
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Lastly, surplus cash can have an impact on the Inheritance Tax status of a business, as it can affect the availability of the all-important 100% Business Property Relief. Surplus cash levels may cause the relief to be restricted where it has remained unused for a period of time, or it could cause the 100% relief to be denied in full.
Holding too much cash, especially without a defined business purpose, can create unanticipated consequences for business owners. Forward planning – and a discussion with a tax adviser, well ahead of any transaction, is essential.