A profitable owner-managed company with no debt and a bank balance that has grown every year because no decision has been made about what it is for. Taking it out felt expensive, leaving it in felt safe, and the two options have never been put side by side.
8 min read · 11 August 2026 · Altro Partners, by Equity & General
£440,000
of a £620,000 bank balance is surplus in the worked example below, once working capital, tax reserves and a committed order are set aside.
Illustration using a made-up company
Two things changed on 6 April 2026. Dividend tax rates rose, and the inheritance tax treatment of business assets changed.
1
Why the balance keeps growing
Following Autumn Budget 2025, the ordinary rate of dividend tax rose from 8.75% to 10.75% and the upper rate from 33.75% to 35.75% on 6 April 2026, with the additional rate unchanged at 39.35% and the dividend allowance at £500 (gov.uk, Tax on dividends). For an owner already drawing to the top of the higher-rate band, each additional £10,000 of dividend costs £200 more than it did last year.
The accountant sees the balance once a year and records it. A financial planner does not see it at all if the client has never met one. Cash grows every year it is left, and it is one of the six situations in the accounts that call for a financial planner.
2
An illustration
Illustration using a made-up company. A fabrication company, turnover £2.4m, net trading profit £310,000, no borrowings, cash at bank £620,000. A quarter’s overheads, the VAT and corporation tax reserves and one committed machine order put the working capital requirement at £180,000.
What the business needs
Made-up figures
Cash at bank£620,000
A quarter’s overheads, the VAT and corporation tax reserves, and one committed machine order£180,000
Surplus, with no decision recorded about what it is for£440,000
Assume the balance earns 3% gross, which on £620,000 is £18,600 of interest. Trading profit plus interest takes taxable profits to £328,600, above the £250,000 upper limit, so the 25% main rate applies (gov.uk, Corporation Tax rates) and £4,650 of the interest goes in corporation tax. The company keeps £13,950. A company in the marginal relief band between £50,000 and £250,000 pays an effective 26.5% on profits in that band. That is the visible cost, and it is the smallest of the three.
Three separate rules apply to the same balance. Figures illustrative.
3
Three tests the cash has to pass
Business property relief
Section 112 of the Inheritance Tax Act 1984 removes relief from any asset that was neither used wholly or mainly for the purposes of the business during the previous two years nor required at the time of transfer for its future use. HMRC’s Shares and Assets Valuation Manual says valuers examine cash, bank and building society accounts (SVM111210) and treats surplus cash beyond present and future needs as an excepted asset (SVM111220).
In Barclays Bank Trust Co Ltd v IRC (1998) a trading company held around £450,000 in cash; about £150,000 was accepted as needed by the business and the remaining £300,000 was an excepted asset. Applied to the illustration, the £440,000 attracts no relief, which at the 40% inheritance tax rate (gov.uk, Inheritance Tax) is £176,000 of tax on a current account balance.
The trading company test
Business asset disposal relief requires a trading company, one carrying on trading activities without substantial non-trading activities. HMRC’s Capital Gains Manual CG64090 uses 20% of turnover, assets, expenses or time as its marker, although the Upper Tribunal in Allam v HMRC (2021) declined to treat that percentage as the governing test.
Cash alongside a let property, a portfolio or a loan to the owner’s other company is how the non-trading total builds. The relief rate is 18% on qualifying gains from 6 April 2026, up from 14% in 2025/26 and 10% before April 2025 (gov.uk, Business Asset Disposal Relief).
The small profits rate
Under section 18N of the Corporation Tax Act 2010, a close company is a close investment-holding company unless it exists wholly or mainly to trade, to invest in land for letting to unconnected parties, or as a member of a group doing one of those things. A close investment-holding company gets neither the 19% small profits rate nor marginal relief; 25% applies to every pound (HMRC CTM03951).
A trading company holding surplus funds on deposit is still trading (HMRC CTM60730). The risk is a company that has largely stopped trading and still holds the balance.
4
What changed on 6 April 2026
On 23 December 2025 the government confirmed that the allowance for 100% agricultural and business property relief would be £2.5 million per estate, raised from the £1 million announced at Autumn Budget 2024, and the measure became law in the Finance Act 2026. From 6 April 2026, qualifying assets above £2.5 million get relief at 50%, an effective inheritance tax rate of 20% on the excess. Unused allowance is transferable to a spouse or civil partner, and the tax can be paid in up to ten equal annual instalments, interest-free.
£2.5m
of combined business and agricultural property gets 100% relief per estate from 6 April 2026
50%
relief above that, an effective inheritance tax rate of 20% on the excess
10
equal annual instalments, interest-free, for the tax on business property
Finance Act 2026; announcement 23 December 2025.
The higher allowance means fewer estates reach the cliff edge than the original proposal implied. The excepted assets rule was never part of the allowance debate and has not changed: surplus cash does not use up the £2.5 million allowance because it never qualified for relief. A client reassured that their business is covered may hold a six-figure balance that is not. From 6 April 2027 most unused pension funds also count in the estate (Finance Act 2026), covered in the trust register and inheritance tax.
5
Where the accountant stops
Accountancy work
Establishing the working capital requirement, identifying the surplus, testing it against the excepted assets rule and checking the trading percentages.
Regulated advice
Deciding what the surplus should do: whether it leaves as remuneration, goes into an employer pension contribution against an annual allowance of £60,000 for 2026/27 with carry forward from the previous three tax years (gov.uk, Tax on your private pension contributions), is invested, or is retained against a documented purpose.
The FCA’s Financial Lives 2024 survey found that 8.6% of UK adults had taken regulated financial advice in the previous twelve months, and 13% of the self-employed. The lang cat’s State of Advice Report 2025 counts fewer than 5,000 IFA firms. A 48-year-old fabricator whose wealth is a deposit balance inside a limited company is seen each year by their accountant. The wider picture is on the advice gap.
Two things to do this week
Run a surplus filter. Sort the corporate client list by cash at bank against a quarter of annual overheads. Any client where the balance is more than double that number goes on a short list.
Put the working capital figure in writing. At the next year-end meeting, agree the figure the business needs and minute it, with any documented future purpose for the rest: a named acquisition target, a quoted machine, a lender’s requirement. That note is the evidence the excepted assets test asks for, and it shows the client the surplus as a separate number.
Common questions
Can we tell a client how much cash the company should keep?
Yes. 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. The next question, what the surplus should do, whether a deposit, an investment or an employer pension contribution, is regulated advice for the Equity & General financial planner.
How much cash is too much for business property relief?
There is no statutory figure. 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 (1998) a company held around £450,000 in cash; about £150,000 was accepted as required by the business and the remaining £300,000 was an excepted asset. The test is need and documented future purpose, so the defence is evidence made at the time.
Does surplus cash put business asset disposal relief at risk?
It can. The relief requires a trading company, one carrying on trading activities without substantial non-trading activities. HMRC's Capital Gains Manual CG64090 uses 20% of turnover, assets, expenses or time as its marker, although the Upper Tribunal in Allam v HMRC (2021) declined to treat that percentage as the governing test. Cash alongside an investment property, a share portfolio or a loan to a connected company builds the non-trading total. The relief rate is 18% on qualifying gains from 6 April 2026 (gov.uk, Business Asset Disposal Relief).
Does holding cash for a possible acquisition protect it?
Not on its own. In Barclays Bank Trust Co Ltd v IRC the cash was held as a contingency in case a business opportunity arose, and that did not save the £300,000. A general intention to be ready is not an asset required for the future use of the business. Board minutes naming a target, heads of terms, a quotation for plant or a lender's term sheet are what 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. Saying that £440,000 appears to exceed what the business needs, that it attracts no relief on death, and that no decision has been taken about it is professional judgement about a client's balance sheet. Naming a product, a provider, a fund or a contribution figure is regulated advice, and an accountancy practice without the FCA permissions cannot do it. State what you can see, ask whether anyone has looked at it, and with the client's consent make the introduction through the portal. Equity & General, FCA number 474163, gives the advice.
Financial planning for your clients, alongside the accounts and tax work
Equity & General holds the FCA authorisation. There is no charge to your firm, and a named partnership director works with you from the first introduction.