A successful business is one that grows and generates regular profits for its shareholders. However, many business owners do 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, Business Property Relief (BPR) 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 BPR will only be available on the assets within a business which are used to carry on its BPR 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 BPR. 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 BPR 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 and commentary from the Bank of England suggesting that a rise in interest rates may not now occur until 2017 at the earliest, 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. For financial periods commencing after 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 will change the accounting and tax treatment of investment bonds, which will now be 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. Since 1 January 2016, a company will now be 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 will provide a drain on cashflow, as the company will be 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 BPR.
There are a handful of corporate BPR investment solutions available in the market place which seek to overcome the dual issues of reduced BPR 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 BPR qualification immediately. Each solution seeks to provide a consistent, inflation-beating return for subscribing businesses by focusing on capital preservation. Each of the corporate BPR solutions offer liquidity allowing the business owners to access their funds should they be required.
Planning opportunities for you and your clients
As mentioned in the BPR Industry Report 2016, the majority of companies with these problems tend to seek advice in the first instance from their accountant, who may not ask the same questions that a professional financial adviser would. As is the case with other tax efficient investment products, it often pays for financial advisers to leverage their network of professional connections to help identify potential clients.
- Firms with excess cash may desire more return for their money than the current rates held on deposit
- Business owners / shareholders concerned about their health or indeed looking to start inheritance tax planning
- Businesses holding investment bonds subject to recent tax changes
- Corporate shells post death of founder shareholder with beneficiary wishing to keep company and not the assets
About TIME Investments
TIME provides tax efficient investment solutions, with our corporate BPR investments services (TIME:CTC) boasting a 20 year track record of successfully achieving Inheritance Tax savings for our investors. The TIME:CTC bespoke service is not a UCIS.
Winner of Best BPR Manager at the Growth Investor Awards 2015, we pride ourselves on offering real transparency around our products, what we invest in and what the risks are. Above all, we always keep our clients at the forefront of our minds and their best interests at heart.
With a nationwide business development team of 23, we are dedicated to supporting the adviser market.
If you have any questions or would like to find out about any of our tax solutions, please contact us on 020 7391 4747 or firstname.lastname@example.org