Business Investment Relief
You arrive in the UK with your family intending to spend no more than a few years here. All your investments, heavy with unrealised capital gains, are retained offshore in anticipation of moving back to your country of origin. The initial cash requirement is minimal, as you are planning to rent a property in London for the duration of your stay.
A couple of years down the line and the children are settled into school, you’re getting on fantastically well with your colleagues in the London office, where you hold a senior position and suddenly the British weather is not as bad as it seemed when you first arrived! The plan is now to remain indefinitely.
The problem is that all of your investments remain offshore but you want to free up some funds for investment in UK businesses in order to generate additional income and future capital. One way of getting previously untaxed funds into the UK without incurring a tax charge is to take advantage of ‘Business Investment Relief’.
The relief was introduced by the UK Government in April 2012 to encourage non-UK domiciled individuals to invest in UK businesses. Initial take up was slow, as figures showed that only 500 of the 118,000 claiming Non-UK domicile status utilised the relief in 2015/16. Some tweaks relaxing the rules were subsequently made in 2017 to encourage greater uptake.
If you have previously sheltered offshore income and gains using the remittance basis, it is possible to remit those funds without incurring a potential 45% tax charge with a simple BIR claim. However, as with any relief, there are certain conditions to be met:
• The investment must typically be made in an eligible trading company or a holding company of an eligible trading group;
• You (as the investor) must receive no uncommercial or untaxed benefits, as a result of the investment; and
• The investment must be made within 45 days of the date that the funds are brought into the UK.
The qualifying company
An eligible trading company is an unlisted private limited company, which is undertaking one or more commercial trades with a view to making a profit, or is preparing to trade within the next five years. The definition of ‘commercial trade’ is significantly wider than one may initially imagine and includes the letting of commercial or residential property. In section two of their ‘Changes to The Remittance Basis’ manual, HMRC also clarifies that the commercial trade should account for 80% or more of the company’s overall activities.
You can make investments into companies by way of a subscription for shares, or a loan to the company on commercial terms.
Listed companies are excluded from the relief, so it is not possible to claim BIR on investments listed on the London Stock Exchange. However, investments into companies on the Alternative Investment Market can still qualify for relief.
HMRC has provided a clearance procedure whereby you can seek advance assurance that a proposed investment will qualify for BIR.
Benefits that can be received
It is crucial that neither you, nor a member of your close family, receive any benefits from the investment other than a commercial return, on which you will pay tax (e.g. dividends on shares or interest on a loan).
For example, uncommercial benefits would include cheap or free accommodation for someone investing in a property or hotel business, or above-market rate salary and bonus if employed by an investee business.
If any benefit is received other than on commercial terms, the relief is withdrawn and the entire investment is treated as remitted to the UK, with potentially significant UK tax implications. There are also other events which may result in a clawback of the remittance exemption.
BIR can be used on its own or with other tax reliefs, such as the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS), both designed to provide taxpayers with tax incentives to invest in small and growing UK businesses.
Disposal of Investment
When you dispose of the investment, the disposal proceeds need to either be removed from the UK or reinvested in another qualifying business within 45 days. If this is not actioned within the 45 days, the original invested amount will become a chargeable remittance.
The shareholding is a UK-situated asset so if gains are made upon disposal, UK capital gains tax will apply. The part of the proceeds subject to UK capital gains tax can be retained in the UK, on the basis it has already been taxed here.
How we can help?
The Wheelhouse Advisors team has a wealth of experience in advising non-UK domiciled individuals on their UK tax obligations. For more information or specific advice regarding the opportunities available through BIR, connect with our Head of Personal Tax Paul Webster, or contact the office.