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Tony Wickenden: Important HMRC clarification on business property relief


Two recent pieces of news have prompted this article. First, an article in the Financial Times on Wednesday 22 January that a significant “pile” of unspent cash has built up in a concentrated pool of quoted companies in the UK – £2.8bn to be precise. Quoted was a recent Deloitte study.

Secondly, a recent ICAEW report of a “re-expression” of HMRC’s view of the impact that unspent corporate cash has on the availability of IHT business property relief for the shareholders of those companies – which would typically not be listed.

The FT article first: Apparently, corporate cash hoarding has significantly increased as a result of the financial crisis. Despite the evidence of cash hoarding (in large Plcs at least) there have also been rising debt levels as firms have used record low interest rates to issue debt.

Some of the dynamics that have influenced cash hoarding in larger PLCs may also be at play for SMEs. And, in particular, concern over the future. Where this state of affairs exists, there is also likely to be the inevitable economic challenge of seeking a “decent return” – difficult when the company owning the cash also wants to minimise risk.

If investment of available cash is considered (and the firm should consider current and near-term cash needs, paying down debt and the potential for pension contributions first) then, apart from the suitability of the underlying investment portfolio, thought will need to be given to the tax implications of the choices available, ie collectives and investment bonds.

That dividends from collectives will usually be paid and received tax free between companies and that indexation allowance (RPI based) is available for realised capital gains will be seen as helpful in relation to investment in collectives. If investment bonds are considered, the notorious (B.I.G) loan relationship rules may need to be considered – dependent on the facts of course. More detail on this subject can be found in
the Techlink Professional library.

And then there is the need to consider the IHT (and CGT) implications of holding cash and/or making investments.

 IHT first: this relates to the second piece of news referred to above. The ICAEW enquiry to HMRC was in relation to the impact that “hoarded cash” might have on IHT business property relief on the shares in the company with the cash.

Here is the exchange with HMRC:

Analysis sent to HMRC

  1. ‘Where a company holds an amount of cash which is in excess of the amount which it “normally holds” and there is no evidence of any given project upon which the funds will be expended, then BP relief will be denied as the excess will be treated as an excepted asset.
  1. Members are aware of the HMRC guidance in IHTM25352, IHTM25342 and SVM111220 and this guidance has proved sufficient in demonstrating the position of HMRC.  It clarifies that cash balances should be viewed in light of the business’s trading cycle and that businesses should keep evidence of discussions surrounding the intended use of cash balances.
  1. However, in the light of the current economic climate and in order to weather the financial adversity faced by many businesses within the UK, it is widely recognised that businesses are retaining increased cash buffers in case of any further downturn in their trade.  This is a widely accepted tactic in surviving a recession to ensure that businesses succeed and reverts to the cliché that “cash is king”.
  1. In this regard, confirmation from HMRC that they are aware of this change in mind-set of business owners and company directors, and look favourably on surplus cash held in this regard, would be extremely useful to our members.’

HMRC response

  1. ‘We understand that due to the financial circumstances in which businesses find themselves, they may choose to hold more cash in case of a potential downturn in trade.  We can also confirm that in recent times we have seen this on a more frequent basis where businesses hold cash in excess of what they would traditionally require.
  1. However, our guidance remains the same, and unless there is evidence which directs us to the fact that the cash is held for an identifiable future purpose, then it is likely it will be treated as an excepted asset.  Therefore the holding of funds as an “excess buffer” to weather the economic climate is not a sufficient reason for it not to be classed as an excepted asset.’

So, the upshot of this appears to be to be aware of large sums of cash to which no specific purpose can be assigned if business property relief is important to you or your clients.

On CGT, for shareholders then it’s “investment” that can have an impact on the availability of entrepreneurs’ relief.  It seems, unlike the IHT position, merely holding cash, which came from trading, in a corporate bank account will not necessarily be treated as an investment and so have no potentially negative impact on the availability of entrepreneurs’ relief.

 A lot will depend on the facts.  Professional advice will be essential and any investment of the cash may require reconsideration of the position on the availability of entrepreneurs’ relief.

Tony Wickenden is joint managing director of Technical Connection


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