When HMRC assesses whether your company’s shares qualify for Business Property Relief, it does not simply accept the company’s total asset value. It applies the excepted assets rule to strip out specific assets it considers outside the scope of the relief.
An asset is an “excepted asset” if it was not used wholly or mainly for the purposes of the business throughout the two years before the transfer — and it is not required at the time of transfer for future use in the business.
Surplus cash is by far the most common excepted asset in trading companies. When a director has been accumulating retained profits over the years — for entirely sensible reasons — HMRC may classify a significant portion of that cash as surplus to trading requirements and exclude it from BPR relief entirely.
HMRC does not accept a general “rainy day fund” as a trading requirement. The question it asks is precise: how much cash does this business actively need to operate?
In practice, HMRC looks at the business’s recent trading pattern: typical monthly outgoings, working capital requirements, any contractual commitments or known near-term capital expenditure. Cash held beyond what can be demonstrated as necessary for those purposes is treated as surplus.
Common director rationales that HMRC does not accept as trading requirements include:
- Holding cash “in case of a downturn” without specific evidence of risk
- Retaining profits to fund unspecified future investments
- Keeping cash in the company because drawing a dividend would trigger Income Tax
None of these constitute the demonstrable trading need HMRC requires. The cash above the operational threshold is at risk.
A Family Investment Company (FIC) resolves the excepted assets problem by moving surplus cash out of the trading company into a separate legal structure before the point of transfer. The cash is no longer held within the trading company, so it cannot be classified as an excepted asset within it.
The trading company is left holding only the cash it genuinely needs to trade — the clean qualifying trading business that HMRC’s BPR rules require. The surplus cash moves into the FIC, where the director continues to exercise full control over how it is invested and distributed.
TLPI establishes and administers FICs for company directors at the point where retained profits are creating BPR exposure. If you would like to understand how much of your current balance sheet may be at risk as an excepted asset, book a free 15-minute call.
Consider a trading company with £1 million in retained cash on the balance sheet. The business can demonstrate it needs £200,000 for working capital and near-term expenditure. HMRC classifies the remaining £800,000 as an excepted asset.
At 40% Inheritance Tax, that is a £320,000 liability — on cash that the director may have assumed was fully protected by BPR.
The scale of this problem grows in proportion to how long the company has been profitable and how little cash has been distributed. Directors who have built up significant retained profits over many years — a natural consequence of running a successful business — are the most exposed.
The risk also applies at the point of transfer, not just at death. A lifetime transfer of shares that triggers a BPR claim is subject to the same excepted assets review.
A free, no-obligation call to discuss your options.