UK: The Business Investment Relief For UK Resident Non-UK Domiciliaries

Last Updated: 10 January 2014
Article by Smith & Williamson

The Business Investment Relief For UK Resident Non-UK Domiciliaries

Introduction

Finance Act 2012 introduced a Business Investment Relief for remitted foreign income and gains with effect from 6 April 2012.

UK resident non-UK domiciled persons are able to remit overseas income and gains to the UK tax-free in respect of certain qualifying business investments, 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 and 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).

The relief

In order to qualify for the Business Investment Relief the following main conditions must be met:

  • the investment must be in a qualifying company (the 'target company') which meets the eligibility conditions;
  • the investment may be in the form of shares or loans;
  • the investment must be made within 45 days of the foreign income or gains being brought to the UK;
  • no benefit can be received by a relevant person, attributable to the investment;
  • a claim is made on the Self Assessment tax return for the year in which the investment is made;
  • on disposal of the investment the proceeds of sale up to the amount of the investment must be taken offshore or reinvested in another qualifying investment within 45 days.

If any of the conditions for the relief are breached, or certain other events occur, the investor is treated as having remitted the amount of the investment to the UK and the remittance will be chargeable to UK tax unless appropriate mitigation steps are taken.

The target company

A company qualifies as a target company if it is a private limited company which is an eligible trading company, an eligible stakeholder company or an eligible holding company. An eligible trading company is a private limited company which is carrying on at least one commercial trade or is preparing to do so within two years and carrying on a commercial trade is all, or substantially all, it does. The phrase 'all or substantially all' is not defined but where a commercial trade accounts for at least 80% of a company's total activities, the company will generally be regarded as meeting this requirement.

For the purpose of Business Investment Relief, trade includes:

  • any activity that is treated as if it were a trade for corporation tax purposes. This includes farming or market gardening, the commercial occupation of land (but not woodland) and the profits of mines, quarries and other concerns;
  • a business of generating income from land, to include profits arising from the renting or leasing of land or property;
  • a company carrying on research and development activities which are intended to lead to a commercial trade.

The business of generating income from land is not restricted to the letting of commercial property and therefore includes residential property. The relief also seems to apply if only a single property is held, provided there is a profit motive. However, if the company holds residential property that is valued over £2m, anti-enveloping charges will apply, unless an exemption can be claimed.

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 relief does not extend to investments in non-corporate entities such as partnerships and sole proprietorships, or in companies which are not limited companies or which are only at the stage of preparing to carry out research and development.

Obtaining a benefit

The relief is available provided no relevant person obtains a benefit directly or indirectly nor becomes entitled to a benefit and there is no expectation that such a benefit will be received, which is related to the making of the investment. A 'benefit' can include money, property, capital, goods or services of any kind. However, a benefit for these purposes does not include anything that would be provided to the relevant person in the ordinary course of business on arm's length terms. In short, any remuneration or benefit must not be excessive and thereby breach the extraction of value rule. The extraction of value rule is not breached when the value received by a relevant person is subject to income tax or corporation tax or would be if the relevant person were chargeable to tax.

Where benefits are not provided in the normal course of business the investment may be treated as a remittance. For example, a yacht provided to a relevant person at no charge, by a boat hire company in which they had made an investment, fails the 'benefit' condition but one hired out at full market rate would not. If the investor is a director a benefit such as a golfing and spa break from a qualifying company in the leisure industry would be reportable on form P11D, subject to income tax and thereby would not be an extraction of value. However, if the investor is not an employee the benefit is not liable to UK tax. It is potentially a chargeable event and mitigating steps should be taken to avoid the investment becoming chargeable.

The 'relevant person' concept is important to the detail of the rules applying to Business Investment Relief. Rules concerning excessive benefits apply not just to the individual investor but also to their spouse or civil partner, the individual's children or grandchildren under 18, the trustees of settlement of which the individual or other relevant person is a beneficiary and close companies in which a relevant person is a participator.

Once value is extracted all the original income or gains invested are treated as remitted. There is no restriction of the deemed remittance in proportion to the value extracted and there is no de minimis allowance. Critically the value extracted is not confined to the target company but may derive from connected companies including companies under the same control as the target or any company controlled by persons connected with the investor. These are termed 'involved companies'

Investment in a close company (which is itself a relevant person) is permissible and where the company subsequently uses the invested funds in the UK, such as to purchase stock or to pay employees, the foreign income and gains will not be treated as a taxable remittance.

Advance assurance procedure

An individual intending to make a business investment is able to ask HMRC for its opinion on whether a proposed investment can be treated as a qualifying investment.

Failure to invest within 45 days Where money or other property is brought to the UK for the purpose of making a qualifying investment, and no qualifying investment is actually made within 45 days, a taxable remittance of the amount not invested would normally occur. However, the money or other property will be treated as not remitted to the UK if it is taken offshore within 45 days beginning with the day on which it was originally brought to the UK. If, following an abortive investment, only part of the income or gains brought to the UK is taken offshore within the 45 day period then the part treated as remitted is to be determined on a just and reasonable basis.

Potentially chargeable events

After a qualifying investment is made, a number of situations might arise which will be treated as a potentially chargeable event. A potentially chargeable event occurs where:

  • the relevant person who made the investment disposes of all or part of their investment;
  • the company in which the investment was made ceases to be an eligible trading company, an eligible stakeholder company or an eligible holding company;
  • the two-year start-up rule is breached, or
  • the extraction of value rule is breached.

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. Following a potentially chargeable event there is a period of grace in which the investor may take appropriate mitigation steps to prevent the remitted income and gains coming into charge. The proceeds must either be taken offshore, or reinvested or a combination of the two. 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 dispose of their holding 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 it will be possible for the taxpayer to acquire a certificate of tax deposit (CTD) 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.

An individual who sells the whole of their investment at a gain will usually have sufficient proceeds to take the steps to mitigate a remittance charge and to pay any CGT. This is because they are only required to take the original invested amount outside the UK and can pay the tax from the 'gain'. However, in the case of a partial disposal where the amount originally invested exceeds the proceeds there may be no funds to pay the tax and the CTD facility is beneficial. By way of example, an individual makes a qualifying investment of £10m and 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 CTD 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. Ordering rules must be applied in the event of a part disposal. Qualifying investments are deemed to be a single holding and disposals are treated as being made in the same order in which the qualifying investments were originally made, that is a first in, first out order.

Whether the disposal is a full or partial disposal of the qualifying investment, or the occurrence of a chargeable event, it becomes necessary to identify exactly what income or gains have been remitted. This is straightforward if the investment was wholly foreign earned income or wholly capital gains. It is more complex if the qualifying investment has been made from a mixed fund, such as a bank account with more than one type of income, gain or clean capital.

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 clean capital and an amount of £2.5m is brought to the UK and invested, the relevant transfer is in the same 2:1:2 ratio. 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.

Record keeping

Where Business Investment Relief is claimed the claimant should keep appropriate evidence to support the initial claim and to show that it continues to be valid through the life of the investment. Evidence should be retained that payments or other benefits received took place on arm's length terms.

Conclusions

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 for whom overseas situs are not excluded.

The draconian rules concerning value extracted from involved companies must be stringently observed.

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain as 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 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. © Smith & Williamson Holdings Limited 2014.

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