Can we tell a client how much cash the company should keep?

Yes, and you are the right person to do it. Sizing a working capital buffer is accountancy work: a quarter's overheads, the VAT and corporation tax reserves, committed capital expenditure, the headroom a lender requires under a covenant. None of that is a regulated activity, and nobody is better placed to put a number on it than the firm that prepares the accounts. What changes character is the next question. Once the conversation moves from how much the business needs to what the surplus should do — a deposit, an investment, an employer pension contribution — it becomes regulated advice, and it belongs to a firm authorised to give it.

How much cash is too much for business property relief?

There is no statutory figure, which is precisely why the question gets left alone. Section 112 of the Inheritance Tax Act 1984 excludes any asset that was neither used wholly or mainly for the business over the previous two years nor required at the time of transfer for its future use. In Barclays Bank Trust Co Ltd v IRC, decided in 1998, a company held around £450,000 in cash; roughly £150,000 was accepted as required by the business, and the remaining £300,000 was treated as an excepted asset. The test is need and documented future purpose rather than a percentage, so the defence is contemporaneous evidence rather than a ratio.

Does surplus cash put Business Asset Disposal Relief at risk?

It can, because the relief requires the company to be a trading company — one carrying on trading activities without substantial non-trading activities. HMRC's guidance has long read substantial as broadly 20% of the relevant measures, although the Upper Tribunal in Allam v HMRC in 2021 declined to treat that percentage as the governing test. Cash alone rarely fails a company on its own, but cash sitting alongside an investment property, a share portfolio or a loan to a connected company is how the total quietly accumulates. With the relief rate now 18% on qualifying gains from 6 April 2026, the cost of failing the test has risen.

Our client is keeping it for a possible acquisition. Does that protect it?

Not on its own. That was very nearly the argument the executors ran in Barclays Bank Trust Co Ltd v IRC: the cash was held as a contingency in case an appropriate business opportunity arose. It did not save the £300,000. A general intention to be ready for something is not the same as an asset being required for the future use of the business, and the distinction turns on evidence created at the time rather than an explanation offered afterwards. Board minutes naming a target, a heads of terms, a quotation for plant, a lender's term sheet — those are the things that turn an intention into a documented purpose.

Is raising this the same as recommending an investment?

No, provided you stop where the regulated work starts. Observing that £440,000 appears to exceed what the business needs, that it currently attracts no relief on death, and that nobody has taken a decision about it, is professional judgement about a client's balance sheet. Naming a product, a provider, a fund or a contribution figure is not, and an accountancy practice without the relevant FCA permissions cannot do it. The clean version of the conversation is to state what you can see, ask whether anyone has looked at it, and with the client's consent introduce someone who is authorised to. Equity & General, FCA number 474163, does the regulated half.

Key person insurance: what happens if the person the business depends on cannot work

The dependency nobody writes down

In most owner-managed companies there is one person the business genuinely cannot do without for six months. Sometimes it is the only person who can win work, sometimes the only one who can do it, and sometimes the only one the bank and the customers actually deal with.

Everybody in the business knows who it is. Almost nobody has worked out what happens if that person is off for a year.

What key person cover does

The company takes out and pays for a policy on that person’s life, and often on serious illness as well. If the worst happens, the money goes to the company.

It is not compensation for the loss. It buys time: time to keep paying wages while revenue drops, to recruit or replace, to reassure a lender, or to sell the business in an orderly way rather than a forced one.

Who counts as a key person

It is not always the owner, and in some businesses it very clearly is not.

The person who brings in most of the work, or holds the relationships that do.
The only person with a licence, accreditation or technical qualification the business trades on.
The person the bank, the main customer or the main supplier actually deals with.
Anyone whose departure would breach a contract, a covenant or a funding condition.

A useful test: if this person were unreachable for six months, what would stop, and what would it cost?

How the amount is usually thought about

There is no formula, but the questions that get people to a sensible figure are consistent:

How much of the company’s revenue would be at risk, and for how long?
What would it cost to recruit and bring in a replacement, realistically?
What borrowing would need servicing or repaying in the meantime?
How long would the business need before it was trading normally again?

A worked illustration

A company turning over £1.2m depends on one director to win and deliver most of the work. If that person were gone, a realistic view might be that half of revenue is at risk for a year while a replacement is found and brought up to speed, and that recruiting takes six months and a fee.

On those assumptions the business needs enough to cover a substantial part of a year’s lost contribution plus the cost of replacement, and enough to keep any borrowing serviced while it happens.

The numbers are illustrative and every business is different. The method is what matters: work out what stops, for how long, and what that costs.

How it differs from the other covers

Key person pays the company, for the loss of someone it depends on.
Relevant life pays the family, and is paid for by the company.
Shareholder protection pays whoever needs to buy the shares.

They are three separate jobs. A business can need all three, and having one does not cover the others.

Tax treatment, briefly

Whether premiums are deductible for the company, and whether a payout is taxable, depends on the purpose of the policy and who benefits. Cover taken out to protect profits is treated differently from cover taken out to repay a loan or to buy shares.

It is worth getting this right at the outset, because the treatment follows how the policy was set up and is difficult to change afterwards.

Questions owners ask

Are the premiums deductible? It depends on the purpose. Cover to protect profits is treated differently from cover taken out to repay a loan or to buy shares, and the treatment follows how the policy was set up.
Is the payout taxable? Again it depends on the purpose and structure, which is why this is worth getting right at the outset.
Does the bank require it? Lenders sometimes do as a condition of a facility, and that version is usually assigned to them rather than paid to the company.
Do we need it if we have shareholder protection? Yes, if the business would suffer as well as the shareholding changing hands. They solve different problems.

What to do next

Ask your accountant whether the accounts show any insurance cost at all beyond the statutory ones. If not, start there.

Deciding what cover is appropriate, and for how much, is a regulated advice question and needs somebody qualified. Your accountant can introduce you.

This article explains how the rules work. It is not advice about what you should do, and it does not take your own circumstances into account. Your accountant is the right place to start, and they can introduce you to a regulated adviser if the answer needs one.

Key person insurance