Reply to: Calling it a day in 12-24 months - and Entrepreneur's relief

[Maslins]

@Scooby you're overthinking this. It won't simply be based on the last month or so. Otherwise on the flipside you could get every investment company mock up some sham trade to operate for a month or two immediatley prior to closure, to then claim ER.

[Scoooby]

There's 4 x 20% tests.

Does/is:
- more than 20% of the company income come from investment activities?
- more than 20% of the company expenditure go on investment activities?
- more than 20% of the director's time spent on investment activities?
- more than 20% of the company's assets/liabilities made up of investment related things?

There's no black and white rule (eg if you pass on 2 or more you're ok), they're just indicators to be considered together to give an overall picture.

Realistically any company liquidating via an MVL will fail the last one. Ie there's no valid trading reason for a company to have (say) £200k cash in a deposit account, that's not required for every day working capital, so could be considered an investment asset. However, owning a BTL property is much more clear cut, it'll likely have no relationship with the trade of the business at all.

Putting money in a savings account realistically takes the director maybe half an hour per year to compare interest and set up the account. Buying and managing a BTL property will have a more significant time investment, though exactly how much will depend on things like whether agents deal with everything.

Income is likely to be larger from a BTL property than a savings account (given interest rates as they are).

Expenditure is likely to be infinitely higher for a BTL property than a savings account (latter will likely cost £nil, former could cost a fair bit, potentially mortgage interest, agent fees, repairs etc).

It’s just dawned on me that this 20% test might cause me an issue (if deciding to apply for ER via an MVL within the next few months) based on the timings on my (limited) company year-end date and receiving interest from a business savings notice account. It’s just a bog-standard, low-interest business savings account on cash saved.

My company year end is March, which coincides with my company’s last contract. Therefore, it is expected that my company will have no trading income within the year of closure (from April 2020). At the same time, I requested closure of a business savings notice account a couple of months ago, which is due to close/mature in June, paying interest of approx. £2,000 (most of this interest accrued in the previous company year).

Therefore technically 100% of company income in this last year will be from ‘investments’, even though in all of the previous years it would have been more like <1%.

Could this cause me an issue if applying for ER or am I over thinking this?

In terms of the other 3 tests and just based on the year of closure (from April):
- 0% expenditure on ‘investment’ activities.
- Definitely <20% of my time is spent on investment activities, if I can include time spent completing company accounts, looking for other contract opportunities etc? Obviously there is no time spent currently generating any income as I have no current contracts.
- As expected with most contractors >20% of company assets are held in cash.

Any advice on this would be much appreciated. Thanks

[TimeToQuit]

HMRC CG64055
TCGA92/S165A(3) defines a “trading company” as a company which carries on trading activities and does not carry on other activities to a substantial extent.

TCGA92/S165A(8) similarly defines “trading group” as a group of companies, one or more of which carries on trading activities, and whose members’ activities taken together do not include activities other than trading activities to a substantial extent.

HMRC CG64060
If a separate investment activity is identified then it will become necessary to determine whether that is substantial in terms of the overall activities.

If its not taking more than 20% of your time then its not going to affect your ability to get ER.

HMRC want you to think that its more complicated than that but its not. This is why large cash balances cannot affect ER. See any number of articles on this point by Kevin Slevin or Pete Miller.

Had a nice long chat with my accountant and his liquidation partner, and they agree with you. If ER is available when I pull the plug, I should qualifiy. But we have budgeted that it will be gone and I have to pay full tax on the withdrawl - just in case.

[Bradley]

It's more to do with the size of the investment and then income received from it, rather than the time spent on it. I don't have time to go into detail but a quick Google will point you in the right direction.

The legislation talks about activities and not anything about the size of the investment. Most tax commentators agree that the passive holding of property or cash etc doesn't affect the availability of ER. Some think that doing this isn't even an activity for the purposes of the legislation.

[Bradley]

Non-trading activities

HMRC CG64055
TCGA92/S165A(3) defines a “trading company” as a company which carries on trading activities and does not carry on other activities to a substantial extent.

TCGA92/S165A(8) similarly defines “trading group” as a group of companies, one or more of which carries on trading activities, and whose members’ activities taken together do not include activities other than trading activities to a substantial extent.

HMRC CG64060
If a separate investment activity is identified then it will become necessary to determine whether that is substantial in terms of the overall activities.

If its not taking more than 20% of your time then its not going to affect your ability to get ER.

HMRC want you to think that its more complicated than that but its not. This is why large cash balances cannot affect ER. See any number of articles on this point by Kevin Slevin or Pete Miller.

[Maslins]

There's 4 x 20% tests.

Does/is:
- more than 20% of the company income come from investment activities?
- more than 20% of the company expenditure go on investment activities?
- more than 20% of the director's time spent on investment activities?
- more than 20% of the company's assets/liabilities made up of investment related things?

There's no black and white rule (eg if you pass on 2 or more you're ok), they're just indicators to be considered together to give an overall picture.

Realistically any company liquidating via an MVL will fail the last one. Ie there's no valid trading reason for a company to have (say) £200k cash in a deposit account, that's not required for every day working capital, so could be considered an investment asset. However, owning a BTL property is much more clear cut, it'll likely have no relationship with the trade of the business at all.

Putting money in a savings account realistically takes the director maybe half an hour per year to compare interest and set up the account. Buying and managing a BTL property will have a more significant time investment, though exactly how much will depend on things like whether agents deal with everything.

Income is likely to be larger from a BTL property than a savings account (given interest rates as they are).

Expenditure is likely to be infinitely higher for a BTL property than a savings account (latter will likely cost £nil, former could cost a fair bit, potentially mortgage interest, agent fees, repairs etc).

[ChimpMaster]

Thanks all for the information thus far. In terms of the above....

1) Its fully managed by a property firm - so next to zero time spent on it
2) It will be a true retirement. As in, dumping computer equipment and moving into a small holding somewhere.

It's more to do with the size of the investment and then income received from it, rather than the time spent on it. I don't have time to go into detail but a quick Google will point you in the right direction.

[TimeToQuit]

the ER test is to do with time spent on other activities other than trading. If the BTL property is managed by an agent then you probably spend not much time on it. The same holds true for large cash deposits. you can still approach HMRC under the non-statutory clearance regime and get their opinion for ER purposes.

The liquidation targeted anti-avoidance rule introduced in 2016 means that you are under threat of HMRC deeming the liquidation distribution as an income distribution and therefore subject to dividend income tax at 38.1% if they decide that you haven't really retired from the contracting business.

Thanks all for the information thus far. In terms of the above....

1) Its fully managed by a property firm - so next to zero time spent on it
2) It will be a true retirement. As in, dumping computer equipment and moving into a small holding somewhere.

[Bradley]

holding a BTL property doesn't stop you getting ER but the MVL TAAR may

the ER test is to do with time spent on other activities other than trading. If the BTL property is managed by an agent then you probably spend not much time on it. The same holds true for large cash deposits. you can still approach HMRC under the non-statutory clearance regime and get their opinion for ER purposes.

The liquidation targeted anti-avoidance rule introduced in 2016 means that you are under threat of HMRC deeming the liquidation distribution as an income distribution and therefore subject to dividend income tax at 38.1% if they decide that you haven't really retired from the contracting business.

[WordIsBond]

ER is about to get nuked in a few weeks time

I've yet to be convinced that the current lot can even manage a budget in a few weeks time. But if they do, not sure they'll manage anything new. Expect a consultation to be announced and nuke it at the autumn budget statement.

[LondonManc]

You've complicated it by buying the property within the company. This could very well negate any claim for ER. Even selling the property now might not help get ER - it depends on how large the investment/return is when compared to your actual trading (contracting) income.

Why not keep the company active as a property rental business? Buy another property with the excess company funds and you've then pretty much created an income stream for life.

I concur - subject to confirming it with your accountant of course!

[simes]

Why not keep the company active as a property rental business? Buy another property with the excess company funds and you've then pretty much created an income stream for life.

Must admit, this is what I have done.

MyCo already had one property in it. Anticipating in 2018 that contracting might no longer be possible by 2020, I bought another one through it with the idea of doing just this, making it a Property company.

That said, in respect of the OP's point, as a first point, is it possible to pay some stamp duty and move it across from LtdCo ownership to personal ownership?

Then as a second point, would the ER element then no longer be an issue for his cash reserves?

[AtW]

ER is about to get nuked in a few weeks time

[Maslins]

I am thinking of using MVL Online as part of the wind up, and have reached out to them for their thoughts on the subject

I thought your comments sounded familiar, hopefully you've now got our (private email) response. Rather than repeat in full here, but for the benefit of others reading:
- buying a BTL property through the company could hinder your chances of qualifying for ER (as ChimpMaster says). It's a very clear "investment" you've made, so blurring the lines of whether your company can fully be considered a "trading" one.
- MVL Online wouldn't be able to deal with the liquidation due to the investment property.

[ChimpMaster]

You've complicated it by buying the property within the company. This could very well negate any claim for ER. Even selling the property now might not help get ER - it depends on how large the investment/return is when compared to your actual trading (contracting) income.

Why not keep the company active as a property rental business? Buy another property with the excess company funds and you've then pretty much created an income stream for life.