A successful company which has traded for many years has built up substantial cash balance and investmet assets.
The cash balance and investments (properties) represent 75% of the net assets of the company.
The turnover of £4m is all derived from trading as a scrap merchant.
The management spend nearly all of their time running the business.
I am familiar with the s165A definition of trading compay and with HMRC's 80:20 opinion and the need to consider the turnover, assets and management, etc..
We have a position where 95% of the income is trade related, 99% of the time is trade related but only 25% of the assets are trade related.
Would you be comfortable in claiming that this company was a trading company?
What about BPR?
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Replies (3)
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Trading
I would be comfortable that the company is a trading company - level of assets is not an important factor in this.
A year or so back I successfully claimed BPR (which requires 51% trading activity) for a company with a balance sheet containing investment property equal to around 90% of value. Turnover, management and employee time were all over 50% trading.
However, why are you asking? If the plan is to give shares away then remember the restriction in TCGA 1992 Sch 7 para 7 will apply because of the investment properties.
From a BPR viewpoint, the investment properties should not be a problem as they do not fall within the definition of excepted assets. More difficult might be cash if it is regarded as surplus to business needs.
The joy of tax - totally diffierent rules for CGT and IHT!
Property rental company and entrepreneur relief
Client owns a private company whose main asset is an industrial estate deriving income from rents. I believe that this is regarded as an investment company for ER purposes although it is carrying on a trade for profit. The business sells units to tenants from time to time where they have expressed an interest rather than be faced with the prospect of vacant units. Is there any argument that this is a trading company for ER purposes?
Trading?
Renting units is not trading. Selling units might be regarded as trading or could simply be regarded as selling capital assets. From your description I would say that the renting is likely to be regarded as the dominant activity. How have the properties been treated on the balance sheet - fixed assets or trading stock? Is there evidence of attempts to sell units that have been unsuccessful leading to renting instead? Is there past history of property development?
Without some strong pointers towards property development and/or property dealing, I would say there is very little chance of a successful claim for ER.