Entrepreneurs’ Relief (ER) can be jeopardised if a company/group has substantial non-trading activities, which are generally taken to be 20%. It is now generally accepted that large, passively held cash balances will not ususally jeopardise the availability of ER on the basis that there are generally few activities from directors and employees in relation to this. This gives many business owners the incentive to accumulate large cash balances with the prospect of a 10% exit event for the cash. This does however give rise to a tension, because commercially, the shareholders are likely to want to maximise the return from the cash by investing it. Here commercial objectives are at odds with ER availability, because the holding of investments can taint the company’s ER status.
A potential way to solve this issue is to set up a separate standalone investment company, and for the surplus cash to be lent across from the trading company/group. The new company can then be used to undertake investment activity without this tainting the status of the trading company/group. This assumes that interest is not charged on the loans – or, if it is, that the interest is less than 20% of the trading company’s income – and that the directors are not seen to be actively managing the loans. However, in most instances, making a loan to a related party would be viewed as equivalent to passively holding cash. Such loans should therefore not taint the trading company’s status. The shareholders are then be able to enjoy the benefit of ER on the whole value of the trading company (including the value of the loans) when they come to sell/liquidate.
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