Company owners are fairly frequently under the impression that there’s some cap on the proportion of their company’s assets that can be held in investments, as opposed to cash. This isn’t the case, although we know why the misapprehension exists.
It’s to do with Business Asset Disposal Relief (the relief previously known as Entrepreneurs’ Relief). When originally introduced, Entrepreneurs’ Relief was fairly exciting. It could reduce the tax you paid when you sold (or liquidated) your company from 40% to 10%! At one point, that could apply to profits of up to £10m - in theory someone could save £3m tax if they qualified for the relief.
There were some conditions. One was that the company had to be wholly or mainly a trading company; non-trading activities couldn’t be substantial. One such activity is investment. HMRC ended up issuing the guideline that they might consider 20% as a proxy for substantial. But was that 20% of income? 20% of assets? 20% of management time being spent on investments? They were non-committal. There were various verdicts in tax tribunals over the years that clarified things a bit - generally suggesting that you were probably OK to have quite a lot of company funds invested as long as you weren’t very actively managing them - but if someone wanted complete certainty on the relief they’d generally tread pretty carefully if they were hoping for savings at the upper end of the scale.
Things are very different now. The top rate of Capital Gains Tax on a company sale or liquidation isn’t 40%, it’s 20%. And you can’t claim the relief on £10m of income, only £1m at most. Back in the day you could theoretically save £3m. Now the maximum benefit is £100,000. The maximum benefit of the relief is only 3.33% of what it once was! On top of that, the majority of company owners will probably not arrive at a point where the relief needs to be claimed anyway - and who knows if the relief will even exist at a future point when you come to sell or liquidate.
So, it’s true that for some company owners there was a strong incentive to err on the side of caution with investing funds, in case the effort to generate a bit more profit in the short term meant the loss of a massive tax benefit in the medium to long term. But it seems to have morphed into a generally held belief that there’s an absolute cap on what a company *can* invest, which isn’t true at all. Whether you *should* invest company funds is another matter! But generally perceptions of some big tax disincentive are misplaced.
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