Have You Considered Whether Your Business Is A Trading Business?
When disposing of a business, a number of Capital Gains Tax reliefs contain conditions that require the business to be trading. These reliefs include: Entrepreneurs’ Relief, gift hold-over relief or reliefs available on the disposal to an Employee Ownership Trust.
A trading company is a company that carries on trading activities, which do not substantially include non-trading activities. This effectively means that no more than 20% of the company’s activities should relate to non-trading such as holding investments in shares or holding investment properties. Factors that may be considered in determining this can include turnover, assets base, expenses, time spent by officers and employees on non-trading activities etc.
Should a company hold excess cash, this could be seen as a non-trading activity. Documentation of why the company holds high levels of cash is imperative. Reasons may include, for example, working capital requirements, future expansion of trading activities, acquisition of trading premises etc.
It should be noted that other tax reliefs such Business Property Relief (BPR) for inheritance tax purposes have their own trading requirement conditions, so assessing the trading status of your business is important, even there isn’t an imminent disposal intended. Ensuring that your business is structured correctly and that trading and non-trading activities are kept separate where necessary, can help ensure that you are not denied valuable tax reliefs.
What is our role?
Our Taxperts can work with you to assess whether available reliefs would apply to your business, and advise of any possible steps that can be taken to ensure the trading condition of any available tax reliefs is met.
If you are thinking of selling your business and would like to discuss your circumstances with sector leading experts, then please contact our Transaction Tax team today.
You can read our advice on ‘Whether you qualify for entrepreneurs’ relief’ here.