No business owner can afford to keep on an employee that doesn’t pull their weight, and the same is true for your working capital. If you’re a business owner with a significant chunk of cash sitting in a bank account, now might be the right time to start making that excess money work harder on your behalf, without taking too much risk.
Having a lot of cash at hand is considered a positive state of affairs for any business, and a sign of a company in good health. Not only does holding large sums of balance sheet cash demonstrate that the company itself is well capitalised, but it can also give the business owner and any major shareholders valuable reassurance that the business is positioned to face any challenging times in the future.
Is cash still king when it’s not earning its keep?
While it makes sense for the business to retain enough liquidity to see it through any potential issues, excess working capital does present many business owners with a dilemma. That hard-earned capital is most likely to be just sitting idle in the business bank account, not generating any meaningful kind of return.
During periods when interest rates are low and inflation is starting to creep up, such as now, having too much capital held on deposit starts to become worryingly expensive. Moreover, for smaller businesses, particularly family-run firms, having too much cash in the bank could potentially have a negative impact on your business and your longer-term wealth. It could mean paying higher taxes or alternatively, missing out on claiming valuable tax reliefs. Therefore, getting the balance right when it comes to managing your excess business cash could prove very significant in the years to come.
Tax planning considerations – Business Relief
In our experience, lots of smaller businesses, and especially family-owned businesses, benefit from being eligible for Business Relief. First introduced back in 1976, Business Relief (BR) makes it easier to pass on the ownership of a business from one generation to the next. As the shares of companies that qualify for Business Relief are exempt from inheritance tax, this means the shares can be passed on without triggering an inheritance tax bill that could potentially force the business to be sold.
However, in situations where the company is found to be holding cash in excess of its business needs, HM Revenue & Customs can restrict the amount of Business Relief available to shareholders upon the death of the business owner. This could result in shareholders facing an inheritance tax charge on the value of their company shares and reduce the amount of the estate the business owner intends to pass on to beneficiaries.
Tax planning considerations – Business Asset Disposal Relief
There are other issues that business owners should be aware of. For example, Business Asset Disposal Relief – which used to be known as Entrepreneurs’ Relief – is a government-approved incentive that makes it possible for business owners to pay a reduced rate of capital gains tax (as low as 10%) when they choose to sell all or part of their business.
Should the company be holding a large amount of surplus cash or other non-trading assets when the shares in the business are sold, or when the company ceases trading, this could result in HM Revenue & Customs restricting the availability of Business Asset Disposal Relief and trigger a larger capital gains tax bill.
So, there really are several good reasons why it makes sense to rethink the amount of spare capital your business is holding onto and think about ways to make that cash work a bit harder.
What we can do
At Financial Advice & Services, we work closely with business owners to provide a range of services based on the highly individual needs of their business. While recognising the importance of keeping an appropriate level of cash within the business, we can use our investment and tax planning experience to invest significant surplus funds more productively. As well as recommending investment strategies that aim to produce a healthy rate of return without taking on excessive risk, we can also take a closer look at your individual tax status, and work out which tax reliefs are valuable to you. We can then suggest investment products and services that will allow your business to invest its spare capital in ways that ensure these valuable reliefs are not lost.
At FAS, we know from our conversations with business owners that cash gives them a much-needed cushion during difficult times. So, we understand the need to not take any undue risks. But for many businesses, we think it makes sense to make sure every penny earned by the business is being put to good use, and earning a positive return, rather than sitting idle.
If you are interested in discussing tax planning strategies or business investment options with one of our experienced financial planners at FAS, please get in touch here.
This content is for information purposes only. It does not constitute investment advice or financial advice.