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Gift relief - trading company - surplus cash

How does holding cash affect "trading nature"

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We have a client situation where a family business is looking to be passed on to the next generation. The trading business itself is worth around £400,000 in the current market.

Within the limited company,  there are cash deposits of around £400,000 (coincidently). These are held in deposit accounts within the company.

The owners of the company are looking to gift their entire shareholding to the next generation. We are concerned that the (relatively) large reserves of cash could cause issues for gift-relief if it was considered to be a "non-trading" element.

What are views on this?

The workaround currently being considered is to invest the surplus cash in a Furnished Holiday Let. As this is considered to be a trade would this alleviate the issues (should there be any)? The furnished holiday let is in no way connected to the current trade of the company. 

Thanks in advance.

Replies (11)

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Psycho
By Wilson Philips
18th Oct 2020 16:59

How did the surplus cash arise? When? What would be considered to be normal working capital requirements for the trade? What type of deposit accounts? Etc etc etc?

In a nutshell, though, the courts have held that the mere holding of cash is not an activity and should not therefore prejudice trade status.

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By Tax Dragon
18th Oct 2020 17:52

To build a bit on Wilson's answer, there's no CBA/CA type issue because cash and generally bank accounts are not chargeable to CGT. (I'm assuming - maybe wrongly, assumptions are always dangerous - that your case is in this 'generally' category.) So (on that assumption) there's no tapering here - it's either full relief if the shares are business assets, or no relief if they're not.

Beyond that, it's hard to say anything useful - perhaps look at the case law as Wilson suggests and see how the facts and factors compare.

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By Montrose
19th Oct 2020 11:32

Sorry to be a party pooper, but HMRC have successfully argued in a number of cases that furnished holiday lets are investment property for IHT purposes

Have a look at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm25276

The numbers may mean that this is not a major a problem taking husband and wife's nil rate bands into account.

There is a problem if the children are not still running the business and a donor dies within seven years of the gift, as the BPR is retrospectively clawed back[see IHTA s124A(1)] when looking if a PET is chargeable, A way round this is to settle the shares, when the peculiar claw back provisions ofs.124A(2) can mean that the claw back is painless.

A safer route could be to buy a property from which to conduct the current business. Buying a property with the intention of running the business from it at a future date will not give BPR relief until the business is in fact conducted from it.

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Replying to Montrose:
Psycho
By Wilson Philips
19th Oct 2020 12:26

Possibly (Edited) all correct but I don't think relevant to the original question.

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Replying to Wilson Philips:
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By Tax Dragon
19th Oct 2020 11:56

TBH I'm not even sure it's all correct - unless FHL were to become the major part of the business. But, I agree with you, it's a different question. (I could tell that, because it's a different tax, with different rules.)

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Replying to Tax Dragon:
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By The Dullard
19th Oct 2020 13:17

It maybe a different tax to the one the OP was talking about, but it's a relevant tax in the context of the plan. However, it is also worth noting that the CGT test is "substantial" (=20% per HMRC) and the IHT test is "wholly or mainly" (= >50%).

I was replying to your point before you edited, incidentally.

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Replying to The Dullard:
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By Tax Dragon
19th Oct 2020 14:21

If I edited (which I honestly don't recall doing... what had I said?), it was within 30 seconds. So, yes, hands up, I do make some immediate edits when I read back and realise I've not said what I meant (or, worse, have said what I didn't mean), but I haven't exactly 'done a Justin*' here. Or anywhere.

*edit :-)... or a 'Wilson'...

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Replying to Tax Dragon:
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By The Dullard
19th Oct 2020 15:41

Maybe I read it differently before and after my comment.

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Replying to The Dullard:
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By Tax Dragon
19th Oct 2020 16:07

I think you were multi-tasking - responding to Wilson and me in one sentence.

Threads are hard enough to follow with replies to one comment at a time :-)

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By Montrose
21st Oct 2020 16:35

Cancelled

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Replying to Montrose:
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By Tax Dragon
21st Oct 2020 16:37

Montrose wrote:

Cancelled

Agreed.

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