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A point against the 2 table approach is what happens if inactivity is flagged incorrectly, it’s far easier to unflag records as against transferring these records back again.

I don’t think this is much of an issue. You can easily make it more difficult to accidentally flag/unflag the field by using a form to view the data (which is really a much better way to view the data anyway.) In the form, just add an ‘event’ to the particular field control (i.e. the “Active” field), which will open a message box saying something like “are you sure you want to change this to Active/Inactive”, along with Yes/No buttons.