Too Much Cash In Business Loses Tax Relief

Published / Last Updated on 12/11/2014

Video explains how having too much cash in your business may result in the loss of or reduction in entrepreneurs relief and business property relief.


“Hello there. The subject for this video is you are running your own business, you’re working seven days a week, just like I do, and you're holding too much cash now in your business.

So you’ve been successful, careful, managed your business, done all of the things that you think are right to do with your business and you’ve got a very healthy bank balance inside the business.

The issue here, the subject is: ‘having too much cash in your business’.

What is the impact of that?  Apart from the usual things of right, well if you're holding money and business bank accounts, you know, you may only be earning 0% on your business current account and getting charges and you may be getting a 0.5% in interest rate on deposit accounts, in the business deposit savings account. 

But it also has other repercussions and I want to tackle two of those in this video.

1. The first one is entrepreneurs relief.  

What entrepreneurs relief is: when you sell a business, when you sell shares in your limited company for example, you can make a profit, you can realise a gain of up to £10 million in your lifetime, claim entrepreneurs relief and then only pay 10% capital gains tax instead of 18% and 28% etc.

However, this 10% entrepreneurs relief: if you hold too much cash then you may fall foul of it.  What HMRC specifies is if less than 20% of the company's activities are to do with real trade then you may lose entrepreneurs relief.

So 20% of the company's activities: if it's that or more which [is] not to do with trade then you could have a problem, you could lose relief.  Less than 20% is to do with company activity:  Big one!

2. The next one is business property and assets relief.  Business property relief.

What that's to do with is: essentially for a trading business, the day that you die your business, because it's a trading business, can pass inheritance tax free to your loved ones.  So you can leave your business interest to your loved ones with no inheritance tax liability provided it's a trading business.

But what if you've got a large cash balance? What we've looked at there is if you have cash holdings in your business of more than 25% of turnover then it may not be considered a trading business.  You may lose business property relief on death.


It's a quandary. It's ‘well I am working hard at managing my business well, I’ve got plenty of cash flow and cash in the business’ but you might lose entrepreneurs relief if you choose to sell the business but not a lot of it is company activity because you built about the cash reserve. On the other side, if you pass away, from an inheritance tax point of view, if your cash balance is large, more than 25% of annual turnover, you may not be considered a trading business again and you lose business property relief.

So that's where you need to come to us and seek professional advice because if you're holding large cash balances in your business you may need to think about investing that money in a different way via some sort of ‘trade’ or ‘tradey’ type investment plan so that you can still protect yourself for entrepreneurs relief and still protect yourself for business property relief

So having a big cash balance in your business isn't always that good.  Hmm, I never thought I would say that!  Thanks very much for watching.”

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