What surplus cash in a client company can mean for tax, how to judge how much is surplus, and how to raise it with the client.
A cash balance that has grown every year with no stated purpose sits on the balance sheet you are already looking at.
The accounts show the balance and the interest it earned. They do not show whether anyone has decided to hold it, or what it is for.
Holding it has tax consequences, and those are your firm’s area.
None of the three rules applies to cash on its own. Each applies to cash beyond what the business needs, which is a judgement about the particular company.
Cash held beyond the reasonable requirements of the business can be treated as an excepted asset and gets no relief on death, even where the shares qualify (Inheritance Tax Act 1984 s.112; HMRC Shares and Assets Valuation Manual SVM111220). From 6 April 2026, 100% relief covers the first £2.5 million of combined qualifying business and agricultural property, with 50% relief above that (Finance Act 2026).
The relief taxes qualifying gains at 18% from 6 April 2026, up to a lifetime limit of £1 million, and the company has to be a trading company throughout the two years before the sale (gov.uk, Business Asset Disposal Relief). HMRC treats a company with substantial non-trading activities or assets as not trading, and uses 20% of turnover, assets, expenses or time as its marker (HMRC Capital Gains Manual CG64090). Cash the trade does not need counts towards that.
The small profits rate is 19% on profits up to £50,000 and the main rate is 25% on profits above £250,000, with marginal relief between (gov.uk, Corporation Tax rates). A close investment-holding company cannot use the small profits rate (Corporation Tax Act 2010 s.18N; HMRC CTM03951). A trading company holding surplus funds on deposit is still a trading company (HMRC CTM60730). The risk is where the company has largely stopped trading and holds investments.
All three rules turn on the same fact, cash beyond what the business needs. The amount at issue grows each year the cash accumulates.
The legislation sets no threshold. The test is whether the cash is beyond the reasonable requirements of the business, judged for that company. HMRC’s valuers examine cash and bank balances and treat cash beyond the present and future needs of the business as an excepted asset (HMRC Shares and Assets Valuation Manual SVM111210 and SVM111220).
The surplus is the amount above what those answers show the business needs.
The illustration uses a made-up company with a cash balance of £620,000, three employees, overheads of £45,000 a quarter, and one equipment order committed for next year. Six months of overheads is £90,000. Adding a further £90,000 for VAT and corporation tax reserves and the committed equipment order gives £180,000. That leaves £440,000 the business does not need.
A made-up company
That £440,000 is the amount at issue. It may be an excepted asset for business property relief, it raises the trading-status question on a future sale, and it would count as investment if the company stopped trading. It is also earning only deposit interest.
The method is to separate what the business needs from what has accumulated.
Two of those together is enough to raise it at the year-end meeting.
You can describe what you can see and what it may affect. Telling the client what to do with the money is regulated advice.
Wording you can use“Retained profit has grown again this year and nothing is planned for it. Cash held well beyond what the business needs can affect business property relief, and whether the company still counts as a trading company on a sale. Would it be useful to have the financial adviser we work with look at it?”
The Equity & General financial adviser works through with the client what the money is for. Some of it is working capital and some is earmarked for the next few years, and the planning covers the rest.
Your firm keeps the corporation tax and the accounts. The introduction is tracked in your portal from the first call to the advice being in place. If there is nothing to be done, the adviser says so.
What the client should do with the surplus depends on their age, plans, other assets, attitude to risk and timescale, and that is regulated advice.
Do not suggest that the company invests the surplus, that the owner extracts it, or that it goes into a pension. Those are recommendations, and the financial adviser makes them.
Equity & General is authorised and regulated by the Financial Conduct Authority. There is no charge to your firm, and we do everything to set it up for you.