No entrepreneurs relief with Aldermore account

[Lewis]

I decided to take a look at the IPSE forums today having not looked in years. I came across a thread that says you can't close a company and claim entrepreneurs relief if you have (or have ever had?) a three month notice Aldermore account which holds >20% of company assets. Apparently it counts as an investment. It says the advice comes from MVL.

Is this true?!!

Edit: Re-reading post it says "3 month term account" not "three month notice". I have a 30 day notice business savings account, I hope that doesn't prevent me from potentially claiming ER in the future - I would be very surprised if it did.

[Maslins]

"...advice comes from MVL" - is like saying advice comes from year end accounts. MVL stands for members voluntary liquidation, it's just a process. If you possibly meant "MVL Online" which is our sister company...or one of the other company names revolving around MVL then perhaps makes more sense. I can confirm didn't come from MVL Online though.

To qualify for entrepreneurs relief, the company needs to be a trading company, rather than an investment company. Grey area is where do you draw the line. Many trading companies will have small investments, even if it's just cash in a deposit account.

HMRC do have some "20% tests" to help give guidance...but with those 99.9% of our clients will easily pass 3 of the 4 tests, whilst badly failing the 4th. I personally think HMRC would be hard pressed to argue the case based on just 1 of 4 tests. See MVLO's views on trading vs investment here.

[Lewis]

Apologies, my mistake. I though they were referring to MVL Online when I read the post but I can see now they weren't (the advice was from a tax helpline - I assume IPSE's, but who knows).

But you've answered my question, 30 day notice business savings accounts should not be an issue with ER.

Many thanks.

[TheFaQQer]

IIRC, the poster in question had a significant "investment" in a longer term account.

At the end of each year, I lock away my guess of the corporation tax bill in an account until it is just before due, so I guess I'd be caught if I was liquidating the company.

[TheCyclingProgrammer]

I don't think there is a definitive answer to this as there isn't a great deal of case law, unless I'm mistaken.

I always thought one of the tests was that you were actively managing your investments (sticking the money in a savings account seems pretty passive to me) and the proportion of your overall turnover the investment income makes up - not much I'd have thought from a savings account.

You could apply for clearance from HMRC if you want some certainty I guess but ultimately you just need to make an informed decision. Speak to your accountant.

[Lewis]

Thanks all.

[jamesbrown]

This is not, primarily, a question about ER, but the distinction between a trading company and an investment company. If there's a risk that your company could be designated a Close Investment Company (CIC or CIHC), there's a risk that ER wouldn't apply. However, in my view, there is almost no risk of a standard contracting company (that has deposit accounts earning interest) being designated a CIC.

CTM60710 - Close companies: close investment holding companies: definition
CTM60730 - Close companies: close investment holding companies: wholly or mainly

[TheCyclingProgrammer]

This is not, primarily, a question about ER, but the distinction between a trading company and an investment company. If there's a risk that your company could be designated a Close Investment Company (CIC or CIHC), there's a risk that ER wouldn't apply. However, in my view, there is almost no risk of a standard contracting company (that has deposit accounts earning interest) being designated a CIC.

CTM60710 - Close companies: close investment holding companies: definition
CTM60730 - Close companies: close investment holding companies: wholly or mainly

Some discussion here too:

Contractor Doctor: Can Entrepreneur

I agree with this. I think the risk becomes much greater when you do effectively stop trading (e.g. actively working on contracts/projects) but have a large amount of retained capital in the company that you then seek to invest. I think HMRC would have a reasonable case to make that it was no longer a trading company.

For this reason, I think unless you're just planning to take a short break, if you stop contracting and have a lot of retained profit in YourCo you would be far better off liquidating the company, taking the capital distribution (with ER) and investing the money personally rather than doing anything with the company funds (alternatively, leave the money in the company and draw down dividends up to the HR threshold until the pot is empty which could be a viable plan for some).

[jamesbrown]

I agree with this. I think the risk becomes much greater when you do effectively stop trading (e.g. actively working on contracts/projects) but have a large amount of retained capital in the company that you then seek to invest. I think HMRC would have a reasonable case to make that it was no longer a trading company.

For this reason, I think unless you're just planning to take a short break, if you stop contracting and have a lot of retained profit in YourCo you would be far better off liquidating the company, taking the capital distribution (with ER) and investing the money personally rather than doing anything with the company funds (alternatively, leave the money in the company and draw down dividends up to the HR threshold until the pot is empty which could be a viable plan for some).

Agreed; if you stop trading for a significant period without actively seeking work, and the company has non-trading income, it would be more difficult to argue that the company is a trading vehicle. For this (and other reasons), it rarely makes sense to keep a non-trading company open IMHO (even keeping it dormant, which requires no income, rarely makes sense).

[TheCyclingProgrammer]

For this (and other reasons), it rarely makes sense to keep a non-trading company open IMHO (even keeping it dormant, which requires no income, rarely makes sense).

I think the situation where it makes most sense not to close down is where you intend to just keep living off the profits, taking dividends up to the higher rate (with no other income) and therefore do not for-see the need to take a capital distribution. This could save on the costs of an MVL.

Even then, if you have a significant amount it would still make sense to liquidate so you have some flexibility on what you do with the big pot of cash IMO.