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I have a client who has a holding company that owns two qualifying trading subs. He owns 100% of holding company and when the subs are sold in years to come (as is his exit strategy) Holding company will qualify for ER as it holds the qualifying subs - we are happy with those rules.

However, subs are very profitable and he wants to take additional dividends out of the subs each year and store the cash in the holding company - mainly for asset protection - however my fear is cashpiling reserves in the holding company might taint the ER in years to come on the holding company shares

HMRC guidance (CG64060) seems to indicate if the cash is investeed in short term deposits it might be OK however my interpretation of this is that a company that itself has profits/cash, retains them in the company itself is what HMRC are referring to here. So transferring excess cash to the holding company would (to my mind) probably do more than taint the holding company ER by actually changing the holding company's major activity to being not that of a holding company but an investment company.

I would be grateful if anyone can point me to any precedent/legislation or provide thoughts as to whether moving cash into the holding company will be an issue.

(For the record subs both turnover £2m and generate £200k profit pa each, holding co at present is just that, it receives dividends and pays out equal dividends to teh sahreholder, we are talking about moving £500k - £1m to the holding co over the next 3/4 years)

Thanks

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By User deleted
09th Dec 2012 20:05

The first point to note is that only individuals could claim ER, not the holding company. The holding company can be part of a trading group e.g. together with trading subsidiaries. A trading group is one..............the activities of whose members when taken together do not include to a substantial extent activities other than trading activities (s.165A(8) TCGA 1992). HMRC defines 'substantial' to mean 20%. 

So if the cash balances are below 20% there shouldn't be a problem anyway. If more then 20% but are generated out of 'trading activities' that too should be fine. So the trading subsidiaries holding cash balances in excess of 20% look fine to me. Should the holding company have cash balances of 20% or more then, in my view, the 'trading activities' condition is not met.

 

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By Ding Dong
10th Dec 2012 11:53

Thankyou and

Thankyou for the answer taxguru - you clarified a rather simple point I overlooked in that the % was of the whole groups activities.

If I may can I ask how the 20% might be calculated as as far as assets are concerned.

Where income is concerned (and time and management effort) the management of the cash balance will not exceed 20% so no issues, however if the cash (let's say £1m) is taken as a % of the GROUP's NET assets then it will be more than 20% however it is unlikely to be more than 20% of the GROUP'S GROSS assets as debtor and fixed asset balances are relatively high.

The Holding company itself only has £200 in its balance sheet at present being the investments at cost in teh subsidiaries, if it held any cash at all it would exceed 20% in itself but maybe not the group - as stated above.

I would be grateful if you (or another) might add their interpretation on this point.

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