Cash is king... so make sure it's protected

9 September 2021

If the pandemic’s taught businesses anything, it’s that a healthy cash reserve and strong cash flow is imperative for survival.

However, some businesses, particularly in the Construction & Built Environment sector, have built up strong cash reserves in the bank. These reserves have been built up over time given the recent growth in the sector or kept to one side just in case. While excess cash is often a welcomed position to be in for cash flow reasons, some of the commercial and tax implications might not be favourable depending on the medium to long term objectives.

Across the construction industry, we’ve seen supply chains have already been exposed to significant risks that will need to be effectively managed, monitored and mitigated to ensure we have a sustainable industry in the short, medium, and long term.

The effect of this on cash flow throughout the supply chain is severe. This has led to many in the sector becoming increasingly concerned around existing cash reserves (earmarked as safety cash flow) and being able to protect these reserves from unforeseen circumstances such as creditor claims.


So how can we address the issue of protecting cash reserves?

A Holding Company (HoldCo) structure could help ring-fence and protect significant cash balances in an existing trading company. This involves inserting a new (typically UK) company above the existing trading entity to create a corporate group. In general, a reorganisation to insert a HoldCo should be possible in a way that no tax charges arise.

A Holding Company allows cash to be regularly extracted from the trading entity or entities to HoldCo tax-free via dividends. This cash can then be retained in HoldCo or lent to other subsidiary companies for onward investment.

A HoldCo allows shareholders to safeguard personal wealth, outside of any bank or creditors’ charges which may apply to assets held within a trading entity. This is something particularly important for businesses in the Construction & Built Environment sector.

What about surplus cash that’s earmarked for investment?

 A dedicated investment company could be established as a separate company that sits outside of the existing trading company or group but can be linked to the trading entities through the ownership of some shares.

This provides a platform for shareholders to extract cash into the investment company and use the proceeds to make investments of their choosing with privacy and segregation from the main trading company or group.

Moving cash balances from the trading company or group at the appropriate time can also improve the balance sheet position from a tax perspective. This ensures there aren’t substantial non-trading items such as surplus cash or investments which might adversely impact tax reliefs. For example, business asset disposal relief for capital gains tax and inheritance tax business relief can provide a 100% relief from inheritance tax on qualifying shares.

Introducing an investment company to the corporate structure can usually be achieved with minimal tax complications. This is an attractive option for business owners who wish to grow an investment portfolio in the likes of real estate or stocks and shares.


 

These are just two options that could help protect the surplus cash in your business. Further consideration would need to be given on how these options might align with your longer-term goals as well as how Parent Company Guarantees (PCGs) impact their role.

If you’d like to discuss the concept of a share restructure with one of the team, please don’t hesitate to get in touch – email us

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