BR Q1 2021

MANAGERS IN FOCUS / BERINGEA

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MANAGER VIDEO CONTENT

www.proveneps.co.uk020 7845 7824info@beringea.co.uk

MARK TAYLOR

PARTNER

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5. Managers in Focus

BERINGEABLACKFINCHDOWNINGOCTOPUSSENECATIMEBR SOLUTIONS COMPARISON

What section does this falls under? Spring budget?

Reframing excepted cash assets ??Legal precedent??

INDUSTRY ANALYSIS / REFRAMING EXCEPTED CASH ASSETS

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Legal precedent

The legal precedent here was set in Barclays Bank Trust Co Ltd v IRC [1998] STC (SCD) 125, where the deceased held 50% of the shares in a company with a BR qualifying trade. The company’s turnover was around £600,000, and at the time of the deceased’s death, the company’s cash at bank was approximately £450,000. It was argued for the company that the cash held on the deceased’s death was required at that date for its future business use. HMRC accepted that the company needed cash of around £150,000, but argued that the other £300,000 was an excepted asset. The Special Commissioner commented: “I do not accept that ‘future’ means at any time in the future nor that ‘was required’ includes the possibility that the money might be required should an opportunity arise to make use of the money in two, three or seven years’ time for the purposes of the business. In my opinion and I so hold that ‘required’ implies some imperative that the money will fall to be used upon a given project or for some palpable business purpose.”

According to Starling Bank,“The accepted wisdom is that companies should have three months’ working capital in an accessible bank account.” The Bank of Ireland suggests three to six months. But figures from the Office for National Statistics (ONS) in its, ‘Business insights and impact on the UK economy’ which has been published regularly since June 2020, show that almost one in four businesses now have more than six months cash reserves and that number is increasing.

REFRAMING EXCEPTED CASH ASSETS

G

iven the recent Covid-19 driven lockdowns under which large swathes of UK companies were forced to close, you could be forgiven for thinking that holding significant cash reserves within a company to deal with unexpected cash-flow difficulties is a totally reasonable course of action. But herein lies a potential trap for businesses owners seeking BR qualification.

The ‘excepted assets’ anti-avoidance measure within BR rules extends to cash balances within a business. As a result, a company cannot simply hold reserves to guard against a future economic downturn or unexpected circumstances. Instead, it must be able to show that the cash had a defined future purpose in the business. If not, the unused cash sitting in the business will be classed as ‘excepted’ and BR will not be available on it.

Excepted assets

Assets (including cash) within the business will be considered “excepted assets” and will not qualify for BR unless they are either: used wholly or mainly by the business concerned throughout the two years preceding the transfer to the beneficiary; or required at the time of the transfer for future use for the purposes of the business. Relief is still granted on the remainder of the business’s assets, as long as excepted assets do not account for over 50% of the business, in which case the business as a whole will not qualify for BR.

UK COMPANIES CASH RESERVES: DEC 2020 VS. APR 2021

18.04.21

03.12.20

40%30%20%10%0%

3 MONTHS OR LESS

4-6 MONTHS

MORE THAN 6 MONTHS

Source: Office for National Statistics

What now?

Clearly, Covid-19 has brought about unprecedented circumstances not seen in 2014 or at the time of the Barclays judgement, but no new guidance has been issued by HMRC. KPMG’s approach is to work with businesses to ensure, “relevant records are retained from an IHT perspective in case of HMRC scrutiny. For example, to support significant cash balances being retained by businesses and the current financial crisis has justified those who have adopted a prudent approach in this context."

The upshot is that clients who own businesses should not simply assume that funds sitting inside their business will automatically qualify for BR, particularly if the level of those funds is higher than might ordinarily have been the case prior to the current situation. They cannot just expect that HMRC will identify a higher cash reserve as being a sensible and commercial pandemic protection that obviously qualifies for BR.

In fact, in response to a Freedom of Information request dated 29 April 2021, HMRC confirmed to Intelligent Partnership that it, “has not reframed its calculations of what volume of cash within a business should be considered as 'excepted assets' for the purposes of Business Relief as a result of Covid-19. Each case continues to be considered on its own merits in line with our published guidance.”

The guidance on the ‘future use’ test remains that, “You need to consider the nature and previous history of the business and such evidence as may be produced as to prospective development and capital outlay. In particular, the extent to which cash, bank accounts, building society accounts and similar assets included in the accounts of a business may be excepted assets should always be examined carefully.”

H M R C ' S V I E W S I N 2 0 1 4

In January 2014, in response to a query from the Institute of Chartered Accountants in England & Wales (ICAEW), regarding businesses retaining increased cash buffers in case of any further downturn in trade and HMRC’s view on this, HMRC stated: “We understand that due to the financial circumstances in which businesses find themselves, they may choose to hold more cash in case of a potential downturn in trade. We can also confirm that in recent times we have seen this on a more frequent basis where businesses hold cash in excess of what they would traditionally require. However, our guidance remains the same, and unless there is evidence which directs us to the fact that the cash is held for an identifiable future purpose, then it is likely it will be treated as an excepted asset. Therefore the holding of funds as an ‘excess buffer’ to weather the economic climate is not a sufficient reason for it not to be classed as an excepted asset.”

As a result, typical advice has been to exclude from a company any assets that are not used for the business and for which the potential IHT liability is higher than the cost of excluding the assets (e.g dividend tax).

HMRC HAS NOT REFRAMED ITS CALCULATIONS OF WHAT VOLUME OF CASH WITHIN A BUSINESS SHOULD BE CONSIDERED AS 'EXCEPTED ASSETS' FOR THE PURPOSES OF BUSINESS RELIEF AS A RESULT OF COVID-19.