BADR with excess cash/investment

Company with excess cash/investments: how to reduce Moneyboxing risk in BADR?

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I'd love some advice/views from accountants with actual experience with BADR vs HMRC, for how to reasonably manage maximizing my tax relief versus reducing my HMRC risk, during a 2-year lead-up to MVL.

Key facts:

  • Sole owner & director of consulting/services limited company
  • £75k revenue, £20k expenses, £55k operating profit, plus £7k dividends per year
  • All profits have been retained since 2013. Documented purpose is to 'save up' to purchase business premises, but this hasn't yet eventuated.
  • £400k accumulated profits held in 6 broad & liquid index funds (ETFs). Documented purpose is to treat portfolio like a bank account. Virtually zero time/money/effort is spent on this, just a quick purchase of additional units every couple months as profits build up (buy & hold). Of this £400k portfolio, £70k is unrealized gains.
  • Company has virtually no other assets. I wish I could think of some more tangible & trade-related (& ideally appreciating) asset to more safely 'store' these accumulated profits, but…
  • I also work in a separate PAYE job and have separate personal investment income, and so I cannot take salary or dividends from the company in any tax effective way.

Company is genuinely trading (duck test) and passes all the HMRC 20% thresholds except for asset base (I'm leaving aside the unrealized capital gains). I am aware that Potter (2019) suggests that merely holding bonds is *not* a non-trade 'activity' while Assem Allam (2019) suggests that collecting rent *is* a 'passive activity'

OPTIONS:

(1) Company forges ahead as-is, and emphasize parallels to Potter.

Question: If my ETFs are distributed as part of the liquidation, the company pays tax on the capital gains as part of the liquidation final tax return, *after* it files its final accounts upon cessation of trading. Does this separate once-off capital gain 'income' within liquidation count against the HMRC's 20% tests?

(2) Company sells all shares 2 year prior to MVL, and loans the proceeds to Company B. Company A goes into MVL with assets consisting of a single loan. This might look better than holding 6 ETFs. Downsides: triggering tax on capital gains two years early; final years of investment income within Company B which won't benefit from the 10% BADR.

(3) Company transfers shares in-specie to Company B as a loan of the shares? No CGT triggered by intra-group transfer. In liquidation, I *think* Company B's loan obligation gets transferred to me, so the shares come to me as part of the 10% BADR (?), and Company B pays tax on the capital gains (?). Looks the same as (2), except the without the downsides?

Question: my understanding is that HMRC doesn't *like* surplus cash, but their main leverage is to view it as non-trade activity. In my situation, am I at high risk from other "anti-avoidance" measures, such as deeming the surplus cash to be paid out as distribution (33% tax), which would be much worse than just losing out on BADR (10% vs 20% tax)?

I'm pretty sure there's no clear answer, so anyone's viewpoints based on experience with similar situations is hugely helpful.  Thanks!

Replies (6)

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By Ruddles
02nd Dec 2023 17:10

You’ve clearly done a considerable amount of research so credit to you for that. However, with resources of £400k+, and a separate source of income, you can afford to pay for appropriate professional advice.

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Replying to Ruddles:
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By ckpager
02nd Dec 2023 20:28

Thank you. Yes indeed I can and will, but there is no "one answer" here, so any single person's opinion (whether paid or not) will not definitively resolve these issue, which is why I'm seeking a range of informed input.

Thanks (1)
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By David Ex
02nd Dec 2023 17:20

ckpager wrote:

I'd love some advice/views from accountants ....

Once I understand my options better, I will seek some formal advice, but I'm pretty sure there's no clear answer, so anyone's viewpoints based on experience with similar situations is hugely helpful.  Thanks!

With respect (!), this site isn't intended to give free education and information in order to inform your discussions with someone you might then be paying for advice.

The subject has been discussed here before (can't recall in what depth) if you want to search the site and do your own research.

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Replying to David Ex:
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By ckpager
02nd Dec 2023 20:26

I have done so, and I've specifically incorporated those findings (from this site and elsewhere) into my query. I can't pay anyone to get "the answer" because there is no "answer" - this is a very grey area with a lot of "gut feel." That is why I am seeking out a broader range of informed input, plus there may be issues (despite my research) which I am missing or incorrectly understanding. Apologies if the final paragraph of my post was poorly expressed (too late to edit it now)

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By Tax Dragon
02nd Dec 2023 20:46

In my experience, with a question like this, the more informed the opinion (with one or two exceptions) the less likely it is to be expressed in here.

While knowing nothing about your business (which fact of course weighs against any response here being informed/relevant), I'm mildly curious about the recorded business need for the never-eventuated property.

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By The Dullard
02nd Dec 2023 21:17

With the BADR limit now at only £1 million, and given a 10% tax differential, HMRC are highly unlikely to bother fuching about, even in more significant situations, unless the TAAR is in point, quite frankly. It's just such small beer.

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