Lazy Cash ?
The prospect of surplus cash is one that seems to have nothing but plus points, if an excess of bad debt is essentially bad it follows that an excess of cash is good but what if that money is in a company doing nothing? Surplus cash is essentially cash that exceeds that required for day to day operations
Many companies withhold cash for peace of mind. That feeling of having a large cash balance provides an enviable reserve that provides a buffer should troubled times come calling.
That large cash balance might even be part of a plan that was made a long time ago to buy premises extend the offices or to play a part in the recreation of business that through procrastination has remained un-utilised. If the business is doing well retained profits increase the pot even more. A larger opportunity unutilised. Missing out on opportunities can be costly.
This rainy-day fund could cause issues in the future…
If companies keep large amounts of cash which is not being utilised at all by the day to day running of the business, acting as a reserve for invoices or tax bills they could be at risk of potentially losing their trading status and be deemed as an investment company. If this happens on sale of the business the payable capital gains tax bill could be doubled. Investment companies lose the right to Entrepreneur’s Relief (ER)
Lazy cash could be treated as an accepted asset by HMRC on death and as such will not benefit from business relief. If the owner of the business should die Inheritance tax (IHT) would be payable even if the rest of the company qualified for exemption.
The cash sat in the bank will also be suffering from low interest rate environments and wont even be keeping up with inflation. Essentially the value eroding as time goes by.
So, what are the options?
Moving the cash out of the company all together via pension, dividends could be increased … the tax implications of course increase unless the monies are invested in an EIS or VCT and get 30% of the tax back.
The money could be held within the realms of the business but have the money trading in another qualifying business.
Using surplus cash as a Trade gets it working again. In order to qualify as a trade, the loan must be short term in nature, less than two years with the expectation held that it will be recycled. By turning the trade around, assuming that they will be trading and Business relief qualifying company at the time of the sale or death utilising the lazy cash could potentially solve a few problems.
- Receiving 100% IHT relief through Business Relief now that the cash has been used as a trade.
- The money works for the company. Blackfinch Investments Limited for instance offer 5-8% pa, not a guaranteed rate but a suggestion at a return. Fees of 0.5% exclusive of VAT apply but even they are not payable until the goal of target return has been reached.
If you are in a company that has cash sat as a rainy-day fund, its value eroding in the bank whilst decisions on what to do it with it are not being made, then speak with us or ask your Accountant to do so. Let’s get that money out of the realms of the inactive and breathe some life into it.
(See also - "The 'problem' of Company cash")
SWLaw Investment & Financial Planning Ltd