“Is my company a trading company or an investment company?”

The distinction between a trading company and an investment company is important as having a trading company is one of the criteria stipulated to quality for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), when the business is sold.

To be confirmed as a trading company and qualify for this relief, a company must not have substantial investment activity.  HMRC consider ‘substantial’ to be in excess of 20%.

In more detail, this means your company needs to have:

  • Less than 20% income from investment activities
  • Less than 20% expenses relating to investment activities
  • Less than 20% of your time spent dealing with investment activities, and
  • Less than 20% assets deemed to be investment assets.

HMRC guidelines are vague about what constitutes an investment company, but rental income, interest income from large cash balances or other investments like cryptocurrencies or dividends from subsidiaries could all be questioned.

Given that the receipt of rental income is considered a non-trading activity, it would be reasonable to conclude that property investment companies are not trading companies.

You don’t need to make this distinction about your business alone, ask us for advice if you do have investments in your business.  It’s best to consider the consequences of investment opportunities for trading businesses as early as possible.