Surplus company cash

Why it is worth raising at all

A company balance that has grown every year and has no stated purpose is the most common financial planning signal there is, and the easiest one to see, because it sits on the balance sheet you are already looking at.

The owner is rarely holding it as a strategy. Taking it out felt expensive, leaving it in felt safe, and nobody put the two options side by side on the same page. The balance is then doing nothing except losing real value each year, and the accounts record none of that.

It also has consequences beyond the lost return, and those are squarely in your territory rather than an adviser’s.

The three rules surplus cash can fall foul of

None of these is triggered by cash on its own. Each is triggered by cash that is clearly beyond what the business needs, which is a judgement about the particular company.

• Business property relief. Cash held beyond the reasonable requirements of the business can be treated as an excepted asset, so it does not attract relief on death even though the shares otherwise would.
• Business asset disposal relief. The company has to be a trading company. A large investment or cash position that puts substantial non-trading activity into the picture puts the relief at risk on a future sale.
• The small profits rate. A company that becomes a close investment-holding company loses access to the small profits rate and pays the main rate on all its profits.

The point to hold on to is that all three are about the same underlying fact, looked at through three different rules, and all three get worse the longer the position runs unexamined.

How much is too much

There is no threshold in the legislation, which is what makes the question awkward. What the rules ask is whether the cash is beyond the reasonable requirements of the business, and that is answered by reference to the particular company rather than by a formula.

In practice the questions worth putting to the client are these, and they are questions your firm is better placed to ask than anybody else:

• What is the largest amount the company has ever needed at short notice, and when?
• How many months of overheads is the balance covering, and is that deliberate?
• Is there capital expenditure planned in the next three years, and is it budgeted or just intended?
• Does the company need a cash position to win work, for example to satisfy a tender or a credit check?
• Has any of it been earmarked for a specific purpose that is written down anywhere?

A client who can answer all five has a cash policy, whether or not they call it that, and the surplus is whatever sits above the answers. A client who cannot answer any of them has an accumulated balance nobody has ever made a decision about, which is the more common case.

A worked illustration

Take a company with a cash balance of £620,000, three employees, overheads of roughly £45,000 a quarter and no capital expenditure planned. Working capital of £180,000 would be generous on those numbers, which leaves around £440,000 that the business does not need.

That £440,000 is the amount at issue under all three rules: it is the part that may be an excepted asset for business property relief, the part that raises the trading-status question on a future sale, and the part that pushes the company towards being treated as an investment company. It is also the part earning a deposit rate while the owner has no retirement plan.

The figures are illustrative, and the point is the method rather than the numbers: separate what the business needs from what has simply accumulated, and the conversation becomes concrete.

What to look for in the file

• A cash or deposit balance materially above what the business needs for working capital, held for more than two years.
• No capital expenditure planned or budgeted against it.
• Retained earnings rising year on year while headcount and turnover are flat.
• Directors’ remuneration unchanged for several years while profit has grown.
• Deposit interest that is now a visible figure in its own right.

Two of those together is usually enough to be worth a sentence at the year-end meeting.

What you can say

You can describe what you can see and what it may affect. You cannot tell the client what to do with the money, which is regulated advice.

Wording you can use“Retained profit has grown again this year and there is nothing planned against it. It is worth being aware that cash held well beyond what the business needs can affect business property relief, and can affect whether the company still counts as a trading company on a sale. Would it be useful to have someone look properly at what that surplus should be doing?”

That sentence stays on the right side of the line because it describes a problem you can see and offers an introduction. It does not name a product, a wrapper, a provider or an amount.

What happens next

The adviser takes the client through what the money is actually for, which is usually the first time anybody has asked. Some of it is working capital and stays where it is. Some of it has a job over the next three years. What is left is the part worth planning with.

Your firm keeps the corporation tax and the accounts, and receives a note of what was recommended. If nothing needs doing, the adviser says so.

What this is not

This guide is about recognising the position and raising it. It is not about what the client should then do, which depends on their age, their plans, their other assets, their attitude to risk and their timescale, and which is regulated advice however obvious the answer may look.

In particular, avoid suggesting that the company invest the surplus, that the owner extract it, or that it be paid into a pension. Each of those may turn out to be right, and none of them is yours to say.