A successful business is one that grows and generates regular profits for its shareholders. However, many business owners may not realise that if they retain the profits made within the company and fail to reinvest in new assets, they may lose the valuable tax relief which makes trading business exempt from Inheritance Tax.
First introduced in 1976 (under the name Business Property Relief), Business Relief (BR) provides 100% relief from Inheritance Tax (IHT) on the value of unquoted or AIM listed trading business in the event of the death of a shareholder. Relief from IHT via BR will only be available on the assets within a business which are used to carry on its BR qualifying trade. Whilst a modest amount of cash held for working capital purposes is allowable, a high cash balance that is not earmarked for the future expansion of the company may be treated as an “Excepted Asset” and therefore will not attract BR. Furthermore, should a company’s trading activities start to decline, following the sale of a key subsidiary or the retirement of the founder director / shareholder for example, then a high cash balance may prejudice the availability of BR on the company’s shares entirely.
The number of businesses hoarding corporate cash has increased significantly since the global financial crisis as many companies have delayed or cancelled the decision to expand or acquire new assets as a result of the continuing period of economic uncertainty. With bank deposit rates at record lows, corporate cash held on deposit is also a poor generator of returns for shareholders and is likely to remain so for the foreseeable future.
In the past, businesses have sought to invest surplus cash into investment products, such as investment bonds, with the aim of achieving a higher return. Since 1 January 2016, all UK small companies must draw up their statutory accounts in accordance with Financial Reporting Standard 102 (“FRS102”). This new accounting standard changes the accounting and tax treatment of investment bonds, which are now valued annually under the fair value regime. Previously, a company was only taxed on the gain on the investment bond at the point of surrender.
Companies are now taxed every year on the change in value of the investment bond, regardless of whether or not it’s been surrendered or whether any value has been extracted. This causes a drain on cashflow, as companies are now required to pay corporation tax to HMRC on the unrealised profits of the investment bond. It is important to note that investment products, such as investment bonds may also be considered to be Excepted Assets, which can reduce the availability of BR.
There are a handful of corporate BR investment solutions available in the marketplace which seek to overcome the dual issues of reduced BR eligibility and poor returns on corporate cash. These solutions work to ensure that funds held in the business continue to qualify as trading assets and in most cases will reinstate BR qualification immediately. Each solution seeks to provide a consistent, inflation-beating return for subscribing businesses by focusing on capital preservation. Each of the corporate BR solutions offer liquidity allowing the business owners to access their funds should they be required.
A BR investment represents a much higher risk than investing in a larger, well-established listed company on, say, the FTSE All Share Index. A BR investment is inherently more illiquid than investing in larger, well-established companies and, as a result, you may be unable to sell them at the point you wish to.
The legislation surrounding BR investments and, as a result, their treatment, may change in future and could apply retrospectively.
The high risk nature of BR investments means you may get back significantly less than originally invested. The value of an investment in equities (funds) does not provide the security of capital associated with a deposit account with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.