There is considerable evidence of a trend for UK companies to hold larger cash balances than previously.
Whilst this is clearly at least partly a consequence of general uncertainty about the economic outlook, and specifically perhaps caution about the uncertainty around the impact of Brexit, it is a worldwide phenomenon and a trend which has been increasingly evident since even before the 2008 financial crisis, according to Bank of England research published in 2018. That research particularly highlights the negative impact that the failure to invest this cash in growth has had in terms of potential economic growth. Given historically low interest rates and the fact that many of the tax-advantaged investment vehicles such as ISAs are not open to corporate investors, then there are other options open to a business.
Your company can make pension contributions directly into a pension fund for employees, whether it be a stakeholder scheme or a SIPP, and these should receive full Corporation Tax relief in the year that they are paid (subject to certain restrictions).
They should also be National Insurance–free, which can make them quite a tax-efficient method of extraction, albeit one that ties the monies up until retirement, but then the Directors do not need to rely solely on the sale of the business to retire.
If you do not want to tie your money in pensions, then another consideration could be investing in corporate investments. You can invest largely in the same assets as a personal investor. Therefore, when considering a suitable investment, it is important to consider the company’s investment objectives, time horizon and attitude to risk of the directors. What’s also worth considering is the tax treatment and administration dependent on the type and size of company.
In either case, the need to take advice is important to suit the business needs.
The holding of excess cash and other surplus assets, which that cash might be invested in, may also have a negative impact on some very valuable tax reliefs.
Shareholders in trading companies (particularly privately owned ones) might qualify for Entrepreneur’s Relief or Investors Relief, which potentially reduces the Capital Gains Tax burden on exit to only 10% on a significant proportion of any gain. Within a group of companies, the tax rate on disposal of part of a group’s trading activities may be as low as 0%. These reliefs may be put at risk if a company or group is not ‘substantially’ a trading business. The holding of surplus cash, or other non-business assets, may put the availability of these reliefs at risk. Similarly, the holding of surplus cash or other assets might put at risk the availability of the Inheritance Tax reliefs, which are usually available to protect the value of most trading businesses from
the ravages of Inheritance Tax.
Depending on the objectives of the ownership and management teams involved, some companies have looked to restructure themselves to separate the ownership of trading activities from such surplus assets.
Here at Armstrong Watson, we are uniquely positioned to discuss how to make the right decisions around the surplus cash in your business through our experienced tax and financial planning teams. We provide tax planning, financial planning and wealth management all under one roof.