UK: Reform Of The Taxation Of Non-Domiciled Individuals (2012)

Last Updated: 24 April 2012
Article by Smith & Williamson

Remitting Funds to the UK for Business Investment Introduction

Finance Bill 2012 has been published and includes the proposed legislation on Business Investment Relief for remitted foreign income and gains. This follows a period of consultation and the publication of draft legislation on 6 December. Overall, the Business Investment Relief is a welcome initiative under which UK resident non-domiciled persons will be able to remit overseas income and gains to the UK tax-free in respect of certain qualifying business investments in the UK, including in companies in which they or their associates are involved. The relief is potentially very valuable commercially in allowing the person to utilise offshore resources which have previously been ring-fenced from remittance. There is no constraint on the amount that can be brought to the UK and on which Business Investment Relief is claimed.

Business investment will also potentially attract other existing tax reliefs provided the qualifying conditions for these reliefs are met. Available reliefs include:

  • EIS Relief (income tax relief at 30% on up to £1m of investment with CGT exemption);
  • VCT Relief (income tax relief at 30% on up to £200,000 of investment and CGT exemption);
  • Entrepreneurs' Relief (effective 10% rate of CGT on up to £10m of lifetime gains);
  • Business Property Relief (inheritance tax exemption after investment held 2 years); and
  • potentially the new Seed EIS Relief (income tax relief at 50% and CGT exemption on share subscriptions up to £100,000 in a company with total SEIS investments of no more than £150,000).

The relief

Under pre-6 April 2012 rules, remittance basis taxpayers are liable to UK tax on any foreign income or capital gains which they remit to the UK, irrespective of the purpose for which the income and gains are used. This is a discouragement to making commercial investment in the UK. Schedule 12 of the Finance Bill 2012 introduces a new tax relief from 6 April 2012 for foreign income and gains which are brought to the UK for the purposes of making a qualifying investment. In such cases, provided the relevant conditions are met, the foreign income and gains will not be taxed under the remittance basis. The taxpayer will have to make a specific claim for the relief no later than the first anniversary of 31 January of the tax year following the year in which the remittance takes place. The foreign income or gains remitted and invested may be money or other property. This can include the proceeds from the sale of property which has been purchased outside the UK using foreign income and gains. It is recommended that an investment is made directly from offshore or via a designated personal UK bank account so that remittances can be traced.

In order to attract the relief, a qualifying investment must be made within 45 days of the money or other property being brought to or received in the UK. If the full amount remitted is not invested, the remainder may be taken offshore before the 45 day deadline without being treated as a remittance.

The qualifying investment

The person must either buy newly issued shares in a company or make a loan to the 'target company'. It is not possible to make a qualifying investment by purchase of previously issued shares. The person's shares in or rights under a loan to a company constitute 'the holding'. Where a loan agreement authorises a company to draw down amounts of a loan over time, entry into that loan agreement is not treated as the making of a loan. By way of example, if an individual enters into a loan agreement under which the target company is able to draw down £1 million in four equal instalments of £250,000 over a four-year period and the £1m is retained outside the UK, each drawdown will be a separate qualifying investment.

The target company

The investment must be in an eligible trading company, an eligible stakeholder company or an eligible holding company, to be a qualifying investment. An eligible trading company is a private company carrying on at least one commercial trade, or is preparing to do so within two years. An eligible trading is a private limited company and is understood to include those AIM or PLUS quoted. An eligible stakeholder company is a private limited company which exists wholly for the purpose of making investments in eligible trading companies. An eligible holding company must have a 51% plus subsidiary which is an eligible trading company. The trade is any activity that is treated as a trade for corporation tax purposes and a business of generating income from land. Significantly, this includes generating income from both residential and commercial property. Therefore, there is the prospect of setting up a new residential or commercial property letting company in which the investor and their family are the investors. Carrying on research and development activities will be a commercial trade for these purposes provided it is intended that a commercial trade will benefit from those R&D activities. In all cases care will be needed to ensure that any remuneration or benefit is not excessive.

Partnerships

The Finance Bill 2012 legislation does not extend to investment in unincorporated businesses including partnerships or sole trades. However, the Government will consider extending the new incentive to include business investment in partnerships, with a view to possible legislation in Finance Bill 2013.

Obtaining a benefit

No relevant person should obtain any benefit, directly or indirectly, in relation to the investment. A relevant person includes the individual, certain family members, a trust of which the individual is a beneficiary or a close company of which they are a participator. A benefit is something that would not be provided in the ordinary course of business and is attributable to the investment or would not be available if the investment had not been made. The person can be an employee, including a director.

Realisation of the investment

When a potentially chargeable event occurs the remitted income and gains are brought into charge to UK taxation unless the taxpayer takes specific action within defined time limits. A potentially chargeable event would include the disposal of all or part of the holding. A potentially chargeable event also arises on a breach of a qualifying condition. Following a potentially chargeable event there is a period of grace in which the investor may take steps to prevent the remitted income and gains coming into charge. The proceeds must either be taken offshore or reinvested. The amount required to be taken offshore or reinvested is limited to the amount actually used to make the investment. If the whole of the holding is sold for more than the sum invested, so that there is a capital gain, it is not necessary to take offshore or reinvest the amount of the gain.

However, on a part disposal the person is required to take offshore or reinvest an amount up to the original investment, even if that includes an element of gain. The period of grace in which the proceeds are to be taken offshore or reinvested is generally 45 days. This is the case with a disposal of all or part of the holding. If the chargeable event arises on anything other than a full or partial sale, eg a breach of a condition, the investor has 90 days in which to make the sale and 45 days thereafter to take the proceeds offshore or make the reinvestment.

Retention of funds to meet UK CGT liabilities

When a chargeable event is a transaction that results in a capital gains tax (CGT) liability for the person it will be possible for the taxpayer to acquire a certificate of tax deposit out of the proceeds of sale without having to take offshore or reinvest that amount of tax. The due date of payment of CGT is anything from 10 - 22 months after the event so taking this option does tie up an amount of cash. However, the amount is not treated as having been remitted and therefore overseas income and gains which would otherwise be subject to taxation on remittance can be used to discharge an actual UK tax liability.

By way of example, an individual makes a qualifying investment of £10m. A part sale results in proceeds of £1m and a capital gain of £500,000. The CGT at 28% is £140,000. If the taxpayer acquires a certificate of tax deposit within 45 days of the proceeds becoming available to them they will only need to take offshore or reinvest the balance of £860,000 within the same grace period.

The income and gains brought into charge

UK taxation is triggered if a potentially chargeable event occurs and the taxpayer does not fully or partially mitigate the effect of having made a remittance. It therefore becomes necessary to identify exactly what income or gains have been remitted. Where the amount invested came from a mixed fund containing income, gain and clean capital the amount brought to the UK, the so-called 'relevant transfer', is treated as having been in the same proportions. So if an overseas bank account holds £2m income, £1m gain and £2m capital and an amount of £2.5m is brought to the UK and invested, the relevant transfer is in the same 2:1:2 ratios. If the qualifying conditions are subsequently breached and the taxpayer takes no steps to mitigate the charge an amount of £1m income and £0.5 of gain is chargeable. The tax arises in the UK tax year of the chargeable event, not the tax year in which the investment was made.

Conclusion

Business Investment Relief provides non-doms with an opportunity to use finance offshore to invest in the UK, including in companies in which they and their family are actively involved. This allows funds that have previously been ring-fenced from remittance to be used tax-efficiently in a commercial venture. There is no constraint on the amount that can be brought to the UK and on which Business Investment Relief can be claimed. The Government has previously confirmed that a claim for this relief does not affect entitlement to other UK reliefs such as EIS, VCT or SEIS, provided the relevant conditions are met. This means this relief allows the taxpayer to remit untaxed funds to the UK and make an investment in such a way to reduce the tax payable on UK income and gains. After two years the investment may also be exempt from UK inheritance tax if it qualifies for business property relief. This would enhance the inheritance tax position of a UK resident who is deemed UK domiciled and for whom overseas situs assets are not excluded.

Please Note

This Briefing Note reflects the proposed legislation in the Finance Bill and may be subject to change in Parliament before the Bill is enacted.

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice.

You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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