Across the UK, thousands of SME directors are quietly accumulating excess cash within their companies, often a by-product of years of disciplined trading, prudent cost management, and perhaps a touch of post-pandemic caution. However, while this surplus may seem like a sign of healthy business management, it could also represent a hidden threat to business owners’ estates, a missed opportunity for financial advisers to deliver value, and a threat to wider prudent tax planning. 

The challenge lies in how this surplus cash is classified. Under current HMRC rules, cash that is not considered essential for the company’s day-to-day trading activities may be treated as an “excepted asset.” This introduces a potential inheritance tax (IHT) liability. If HMRC deems the excess liquidity to fall outside the definition of “Relevant Business Property,” the Business Relief (BR) that would typically protect the value of the business from IHT can be withdrawn. This could have potentially serious implications for a director’s financial planning. 

A Complex, Often Overlooked Threat 

It’s common for business owners to be unaware of the “excepted asset” rule, and why wouldn’t they be? Most are focused on growth, not tax classifications. But in the event of death, the implications for their estate and heirs can be profound. The value of their business could suddenly become 40% less valuable to their heirs due to IHT, ultimately eroding what was meant to be a legacy. 

Many directors have attempted to mitigate this risk by assigning a designated purpose to surplus funds, such as earmarking the money for recruitment, R&D, or marketing. However, these tactics come with their own set of problems. HMRC typically expects such allocated cash to be spent within three years. For many firms, spending large sums quickly can lead to inefficient decisions, increased administrative costs, and depleted capital reserves. Indeed, we have witnessed scenarios where well-meaning guidance from accountants, encouraging the engineering of a “designated purpose,” has only made matters worse for the company directors. 

Spending for the sake of spending is no strategy. Not only does it risk draining company value, but it also misses the chance to convert these surplus funds into working assets that can benefit the business, and the directors’ estate.  

Qualifying Investments 

This is where Corporate Business Relief solutions, such as Deepbridge Protect, are carving out an increasingly important role. Deepbridge Protect is the type of tool that advisers can use to help clients restructure excess liquidity into BR-qualifying investments. Specifically designed to assist business owners in repositioning surplus funds, it aims to generate a competitive return while mitigating potential IHT exposure. 

The solution helps convert “excepted assets” into “Relevant Business Property” by deploying cash into actively trading entities with real economic substance. The intended result is that the company retains access to the capital, grows it through trading exposure, and shields it from IHT after just two years of ownership (assuming conditions are met). 

It is an opportunity that blends prudence, control, and estate planning, and one that financial advisers should have in their toolkit. 

Proactively addressing these challenges could also unlock further planning opportunities. For example, where Business Asset Disposal Relief (BADR) is applicable, ensuring a company retains its “trading” status is crucial. BADR allows business owners to pay just 10% Capital Gains Tax on the first £1 million of eligible gains on sale. However, like BR, it is only available on shares in a trading company. 

If excess cash tips the balance and causes the company to be viewed as “non-trading”, the vendor could lose out on both BADR and BR as a costly double hit. 

By helping clients maintain the appropriate trading profile through the careful structuring of excess funds, advisers can not only mitigate IHT risks but also preserve access to CGT reliefs, which can dramatically enhance the value of a future sale. 

Of course, no two companies are the same. Business activity, trading history, and future plans all factor into the Inheritance Tax (IHT) and relief landscape. That’s why advisers need to work closely with clients’ accountants and tax specialists to determine what’s appropriate, as well as recognising the limits of tax-efficient workarounds. 

The real opportunity for advisers is proactive client education. Many business owners are unaware that their hard-earned company cash could become a liability for their estate. Others are unsure how to put the money to work without jeopardising business plans. 

This is where an adviser’s expertise makes a difference. By introducing appropriate tools and guiding clients through the nuanced terrain of BR, excepted assets, and relief eligibility, advisers can deliver technical value to clients and unlock additional funds to be managed. 

With over 5.5 million SMEs in the UK, the potential client base is vast. Many individuals are sitting on substantial cash reserves, often unaware of the Inheritance Tax traps they pose, and advisers need to take a proactive approach to ensure that wider tax planning is not eroded. 

Andrew Aldridge is Chief Operating Officer at Deepbridge Capital