Running a group
How much cash is too much? Protecting trading status for BADR, SSE and Business Relief
Surplus cash can cost a group BADR, SSE and Business Relief. How HMRC test trading status, the 20% indicator, excepted assets, and what to do about it.
By Omar Aswat CTA ·
Profitable owner-managed companies build up cash. That's a good problem to have. But beyond a point, surplus cash can quietly change how the company is treated for tax, and put three of the most valuable reliefs at risk:
- Business Asset Disposal Relief (BADR), which taxes qualifying gains on a share sale at 18% (from 6 April 2026) on up to £1m of lifetime gains;
- the substantial shareholding exemption (SSE), which exempts a company's gain on selling a trading subsidiary;
- Business Relief for inheritance tax, which gives 100% relief on the first £2.5m of qualifying business and agricultural property per person from 6 April 2026, and 50% above that.
A holding company can protect cash from trading risk. It does not, by itself, protect trading status. Here's why, and what you can do about it.
Three reliefs, two different tests
| Relief | Test | Where it comes from | Effect of too much cash |
|---|---|---|---|
| BADR | Trading company, or holding company of a trading group: no substantial non-trading activities | TCGA 1992 s165A | Relief lost entirely on the shares |
| SSE | Company sold must be a trading company or holding company of a trading group | TCGA 1992 Sch 7AC | Exemption lost; gain taxed at 25% |
| Business Relief | Business not wholly or mainly making or holding investments; excepted assets excluded | IHTA 1984 s105, s112 | Relief restricted on the surplus, or lost if investment becomes the main business |
The BADR and SSE tests are cliff edges: either the company is trading or it isn't. Business Relief is more forgiving at the margin but has its own trap in excepted assets.
How HMRC judge "substantial"
For BADR and SSE, a company is trading if its activities do not include non-trading activities "to a substantial extent". HMRC's Capital Gains Manual (CG64090) treats more than 20% as substantial. They look at several indicators:
- non-trading income as a share of total income;
- non-trading assets as a share of the asset base;
- expenses incurred and staff time spent on non-trading activities;
- the company's history.
HMRC say that where neither the income nor the asset indicators suggest the non-trading element exceeds 20%, the case is unlikely to need more detailed review. The indicators are not individual percentage tests. They're weighed together.
Is cash an investment?
Not automatically. HMRC (CG64060) accept that short-term lodgement of surplus funds, such as on deposit, can be part of the trade. The questions are whether the cash meets the trade's cash-flow needs, whether it's earmarked for trading purposes, what it's invested in and how actively it's managed.
But HMRC also say that long-term retention of significant earnings may amount to an investment activity. Cash that has sat for years with no plan, and certainly cash placed in investment portfolios, is likely to count against you.
A simple illustration
This is an illustration, not a client example. A group's balance sheet looks like this:
| Asset | Value |
|---|---|
| Trading assets (equipment, stock, debtors, goodwill at market value) | £4,000,000 |
| Cash needed for working capital | £400,000 |
| Cash with no identified use | £1,100,000 |
| Total | £5,500,000 |
The unearmarked cash is £1.1m of £5.5m, exactly 20% of the asset base. On the asset indicator alone, the group is at HMRC's threshold. If that cash also generates a meaningful share of the group's income, or if a further year's profits are added to it, the position gets worse.
Note the value of goodwill matters. HMRC say current market value can be an appropriate measure, and that it may be right to take account of goodwill that isn't on the balance sheet. So a business with valuable goodwill can often carry more cash than its accounts suggest. That's one reason a proper review uses values, not just the accounts.
Why a holding company doesn't fix this on its own
The usual way to protect cash is to pay it up from the trading company (TradeCo) to a holding company (HoldCo) as a dividend. That dividend is normally exempt from corporation tax, and the cash is then out of reach of TradeCo's creditors. See protecting cash in a holding company.
But for BADR, HoldCo must be the holding company of a trading group, and section 165A treats the group's activities as one business, ignoring activities between group members. Cash in HoldCo is still in the group. Exactly the same 20% analysis applies.
For SSE, the investee company must be trading. If HoldCo sells TradeCo, it's the status of TradeCo (with any subsidiaries of its own) that counts, so cash already moved up to HoldCo helps TradeCo's position. But if your exit is a sale of HoldCo itself, the group test is back.
Business Relief and excepted assets
Business Relief works differently. HoldCo's shares can qualify where its business is wholly or mainly being the holding company of trading companies (IHTA s105(4)(b)). "Wholly or mainly" is a more-than-half test, so a trading group with some surplus cash will usually still qualify.
The restriction comes through excepted assets (s112). An asset that hasn't been used wholly or mainly for the business throughout the last two years, and isn't required for future use, is excluded from the value that gets relief. Use by another group member counts as use for the business.
The leading case, Barclays Bank Trust Co v CIR, sets a high bar: "required" implies some imperative that the money will be used on a given project. HMRC's manual says cash and bank balances should always be examined carefully.
With the £2.5m allowance from April 2026, the stakes are higher. Every pound of excepted assets falls outside relief entirely, while qualifying value above £2.5m still gets 50%. See the £2.5m Business Relief allowance.
What you can do
Earmark cash properly. If cash is being kept for a reason (a new site, a fleet replacement, an acquisition), record it in board minutes and budgets, and keep them up to date.
Use it in the trade. Investment in the business, repaying debt, or funding a trading subsidiary all keep cash trading.
Pay it out. Dividends to shareholders cost income tax at 10.75%, 35.75% or 39.35% for 2026/27, but they take the cash out of the group test for good.
Separate it from the group. A sister company owned directly by the shareholders, holding investments, sits outside the trading group test. Getting assets there typically needs a demerger. See demerging a group and our sister site Demerger Tax (opens in a new tab).
Keep it in a subsidiary investment company, knowingly. A sister or subsidiary company holding investments inside the group protects them from trading risk and keeps profits flowing up tax-free, but it stays within the group test. That's fine while the investment side remains small relative to the trade. See the Structure Lab to model it.
Review early. BADR looks back two years. SSE looks back to the start of the qualifying holding period. Business Relief looks at the last two years. A review well before any sale or succession gives time to act.
Signs it's time to look
- Cash balances have grown for three or more years with no plan.
- Cash has been moved into investment funds, shares or let property.
- Interest or investment income is a noticeable share of total income.
- A sale, a gift of shares or a change in family circumstances is on the horizon.
If any of those apply, book a call. We respond the same working day.
This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.
