A recent flurry of company succession reviews has led to discussions about previous director decisions in relation to excess company cash.
I understand that owner managers of private companies with cash in excess of working capital or growth needs, do not always wish to extract the value in full but are equally reluctant to leave it in the bank with today's dismal interest rates. Choosing alternative investments to provide a better return can seem like a sensible commercial decision, but the negative impact upon various capital tax-based reliefs can outweigh the returns to a significant degree.
When tax professionals talk of capital tax-based reliefs, they generally mean those associated with assets on sale, gift or death which can mitigate tax charges or attract the lowest rates of tax . Whether or not a company is trading or holds investment assets, becomes an important area of review at these trigger points in particular.
Our tax legislation unhelpfully does not provide a common definition of trading companies and as is the nature of our evolving tax law, uncertainty over future changes is a further risk. Whilst this article focuses on the shareholder and capital tax-based reliefs, trading status can impact a number of other areas of tax legislation.
To provide some context for shareholders of private trading companies, I have identified a number of common examples:
- A trading company owning an investment property.
- For larger private trading companies, this may not impact the trading status for Business Asset Disposal Relief or Business Property Relief, but should still be considered.
- Dependent upon your shareholding percentage, a restriction can be placed on the availability on Gift Relief (perhaps when transferring shares to the next generation), generally creating a tax charge on direct transfer. Gift Relief associated with trusts are not impacted by this restriction.
- A trading company owning a 20% shareholding in another trading company.
- For Gift Relief and Business Asset Disposal Relief this may not impact the trading status (the latter depending upon your personal shareholding).
- Business Property Relief can be impacted and should be reviewed closely.
- Note interests <10% can have an impact on all capital tax-based reliefs.
- Building up investment activities with one eye on the 50/50 Business Property Relief test.
- The majority of capital tax reliefs look to an 80/20 trading/investment test as a starting point.
- The 50/50 Business Property Relief test could well be aligned with the 80/20 based tax reliefs.
Most tax professionals I have come across do not live to pour water on your commercial ideas. We are largely here to try and understand the future plans for your company and to outline tax risks and opportunities associated with your business strategy.
In my experience, it is more cost effective to take the time to consider your plans with tax professionals before you do them, rather than suffer the cost of undoing them or worse yet not being aware of the impact until it is too late.
Once the areas of risk and opportunities have been identified, this then enables you to make informed decisions which very well may include losing particular tax reliefs!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.