Clients with surplus cash in their company

Dominique Butters



Do your clients have surplus cash in their company, or, do you work with accountants who may have these clients? If so, I hope this article is of particular use.

Having a healthy bank balance is nirvana for companies but could that nirvana turn into a nightmare for them?
There are many reasons why companies want to keep cash in their companies:

  • They want a war chest to give them peace of mind in case the company hits trouble
  • They may want to buy more premises in the future and/or
  • Another business (and have been saying this for many, many years!)

These are the most common reasons I hear for companies keeping high levels of cash on their balance sheet. However, this can cause potential issues down the line, such as:

  • If they keep far too much cash in the company which is not being utilised (at all) in the day to day running of the business, then they could be in danger of potentially losing their trading status and be deemed as an investment company. If this happens then they could end up losing their Entrepreneur’s Relief (ER) when they sell the business and double their capital gains tax bill!
  • Cash in a company (again here I mean lazy cash which isn’t being used) could be treated as an excepted asset by HMRC on death and as such will not benefit from Business Relief (BR). This means if the business owner died then Inheritance Tax (IHT) would be payable on this cash/excepted asset even if the rest of the company did qualify
  • Due to such miserable interest rates, the cash sat on deposit won’t even be keeping up with inflation, never mind growing, and so companies are losing the buying power on this money as time goes by.

What can be done? There are many options available to these companies to potentially reduce/avoid the potential pitfalls mentioned above, assuming they haven’t found another business to invest into yet, or other ways to spend the money in the business. The four main options are:

  • Move that surplus cash out of the company via a pension (if applicable and desired)
  • Take extra dividends, suffer the tax, invest elsewhere in their own (business owners’) name
  • Take an extra dividend, suffer the tax but invest it into an EIS or VCT and get 30% of the tax back again (often referred to as a four to five year exit strategy of getting money out of a business tax-efficiently)
  • Keep the money WITHIN the realms of the business but have the money TRADING in another qualifying business such as a lending business.

Let’s explore this last point as many company directors really don’t want to take the money from the business for those reasons we have already stated. But, unfortunately, they may never find those premises or another business, or indeed hit troubled times and, if they die or come to sell the business, they could be facing those challenges already mentioned.

The Thrive Corporate Management Service has been set up specifically for the purpose of allowing companies the opportunity to use their excess cash, as a TRADE, within a lending business. In order to qualify as a trade, the loans must be short term in nature (less than two years) with the expectation of them being re-cycled over time. By utilising this cash in another trade, assuming that they will be a trading and BR qualifying company at the time of sale or death, then it could potentially help with:

  • Making their money work harder for them as the target return (net of Blackfinch’s fees) is a very handsome and competitive 4–7%p.a. Of course, this is not guaranteed but is an expected target return.Blackfinch charge an Annual Management Fee of 0.5% +VAT and will only take this after your agreed target return has been achieved
  • Accessibility: this is one of the biggest advantages in case those premises do come up for sale or that fabulous business opportunity arises or, if they do indeed hit troubled times
  • Receiving 100% IHT relief though BR as it is now being used in a trade rather than sat as idle cash
  • Not endangering their trading status, as again, this is now also trading alongside their main business to try and maximise the likelihood of Her Majesty’s Revenue and Customs (HMRC) granting ER at 10% when they sell.

CAPITAL AT RISK

If you know clients/companies in this situation, then please do get in contact. This is also well worth sharing with your professional connections, especially accountants as they would be delighted to have this as a talking point with their clients. If you would like to find out further information about the Thrive Corporate Management Service, please contact:

01684 571 255

enquiries@blackfinch.com

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