Business Investment Relief
DON’T MISS OUT ON ONE OF THE MOST GENEROUS TAX RELIEFS IN A DECADE
If you are a non-domiciled UK resident with offshore funds to invest, you should consider Business Investment Relief (BIR) because it is one of the most generous tax reliefs in a decade. If you are a business looking for investment, this is a good time to look out for potential investment from this source of investor. First announced by the government in April 2012 to attract foreign investors to the UK, BIR offers investors an attractive opportunity and provides businesses in the UK with potential investors.
Although generous, the rules to define what constitutes a remittance to the UK and the conditions that have to be satisfied to secure it are complex, while the financial and domicile circumstances of non-residents/foreign domiciliaries are often equally complex and varied too. HMRC does offer a statutory clearance procedure prior to making a BIR investment. This service should definitely be exploited by any potential investor else the investment could end up being taxed as a remittance, see “What could possibly go wrong?”, below. The summary below is intended only as a helpful guide. For further advice, please contact your account manager. The relevant HMRC Guide can be viewed here.
Before going into some detail about BIR, first let’s look at how taxation works in the UK. There are two ways UK residents are taxed on their worldwide income and gains, either for those that arise or accrue in a particular taxable year ‒ taxed on “the arising basis” ‒ or a UK resident, who is not domiciled in the UK in that year (“a foreign domiciliary”), who may make a claim to be taxed on their non-UK-source income or gains to the extent only that they are remitted to the UK ‒ “the remittance basis”. Foreign domiciles are liable to an arising basis of taxation as regards their UK-source income and gains, but a foreign domiciliary who elects for taxation on the remittance basis in a particular year and who qualifies as a long-term resident, must pay a charge (“a remittance basis charge” or “RBC”). This charge is £30,000 for that year if they have been resident in the UK for at least seven of the previous nine years but fewer than twelve years, or £50,000 if they have been resident in at least twelve of the previous fourteen years. BIR is one of the reliefs that allow sums to be received in the UK without taxation under the remittance basis.
The residence of an individual, trust, or company is central to determining whether or not a liability to UK tax arises and is therefore central to BIR. The Statutory Residency Test (SRT) is used to determine whether an individual is resident in the UK for Income Tax and Capital Gains Tax. For more about the SRT, please read our “Residency Tests: Working Out Your Status”.
BIR means that non-doms can remit overseas income and gains to the UK for qualifying business investments without creating a taxable remittance. BIR can be a very good investment choice, but the process needs careful scrutiny and planning beforehand and constant review thereafter.
The investment can be made in the form of money or other property derived from foreign income and gains from years in which a person was taxed, either on the arising basis or the remittance basis in the tax year in which the investment is made, and still benefit from the relief.
In order for relevant foreign income or gains to qualify for relief from UK tax, the following conditions must be met:
- The investment must be a qualifying investment made in a target company within 45 days of the foreign income and gains being brought to the UK, and
- The taxpayer must claim relief from UK tax under this provision as part of their Self Assessment tax return in the same year the investment was made.
- If the investment is not made, providing the money leaves the UK before 45 days are expired, no tax will be due. Note that in all matters relating to BIR, the investor should keep careful records relating both to the origins of the funds and the investment.
Case Study 1: Failing to claim for BIR on time
Don't pays tax on the remittance basis. He has foreign interest in an offshore bank account, which he earned in 2009–10. He decides to use £15,000 of this to make a qualifying investment and brings the money to the UK on 14 February 2013 and makes the investment on 17 March 2013, within the 45 day period allowed. Don must make his claim for business investment relief by 31 January 2015 via his Self Assessment tax return, but Don fails to make a claim. He is considered to have remitted the £15,000 foreign interest to the UK on 14 February 2013.
Case Study 2: Good record keeping regarding change to the investment and taking the money offshore
On 20 August 2012 Paulo brings £300,000 foreign income to the UK intending to invest in an eligible trading company MKK Limited. Before Paulo makes the investment, MKK inform him that the company has failed to secure funding from other investors. Paulo decides not to go ahead with his investment. On 25 September 2012 he transfers his £300,000 back to his offshore bank account. As Paulo took his foreign income offshore within 45 days of bringing it to the UK, and can evidence his original intentions to make a qualifying investment, there is no taxable remittance.
Case Study 3: Good record keeping regarding change to the investment, but failure to take the funds offshore
Selina brings £500,000, consisting of £250,000 capital and £250,000 foreign income to the UK, on 16 September 2013, intending to make an investment in BSC Limited, an eligible trading company. However, following a due diligence report, she reviews her decision and decides that she will only invest £250,000.
Selina receives 40,000 shares in BSC Ltd. on 28 October 2013. The remaining £250,000 is left in her UK bank account. Selina is able to evidence her changed intentions, but all the money remained in her UK bank account until she used it to buy the shares. She will therefore be considered to have made a qualifying investment with the £250,000 and remitted £125,000* foreign income to the UK. However, if Selina had taken the £250,000 not invested back offshore within 45 days, she would not have made a remittance.
*The proportion of foreign income in the amount originally brought to the UK (£250,000/£500,000) multiplied by the amount not invested (£250,000).
Case Study 4: Concerning the date of investment and change in the business structure
Raoha has owned 100% of the shares in a qualifying trading company CSB Limited since she came to the UK in 2005. She had purchased the shares from an unconnected party for £100,000 using UK-taxed income and gains. As this transaction took place before the business investment relief was introduced it is not a qualifying investment.
In 2013–14 Raoha invests a further £100,000 of her foreign income and receives 100 newly issued shares in CSB in return. She makes a valid claim for BIR on her tax return and the foreign income is not treated as remitted at that time. In 2015–16 CSB sells its trade to an unrelated third party and becomes an investment company. As CSB Limited is now no longer a qualifying company this is a potentially chargeable event and Raoha must take the appropriate mitigation steps if she wants to avoid her foreign income being remitted. Raoha arranges for CSB to buy back the 100 shares issued in 2013–14 for their current market value of £100,000 which she takes offshore immediately. Raoha does not have to dispose of the shares purchased in 2005 as these were not qualifying investments.
Non-UK source income or chargeable gains (“relevant foreign income”) are remitted to the UK if they are:Primary purposes
- Brought to, received, or used in the UK for the benefit of the foreign domiciliary or others who are also treated as “relevant persons” by the rules (including husbands and wives, civil partners, children and grandchildren under the age of 18, associated close companies and settlements);
- Used to pay for a service which is provided in the UK to or for the benefit of the foreign domiciliary or other relevant persons;
- Used (or anything derived from) is used outside the UK to pay a debt which relates to a service provided in the UK, or for the benefit of the foreign domiciliary or other relevant persons (or which relates to other specified property), these are the “primary purposes”; or
- Given to a third party and then applied for any of the primary purposes;
- Transferred to or for the benefit of a third party as part of a ‘back-to-back’ connected operation pursuant to which the third party provides property which is applied for any of the primary purposes.
The investor must be a non-domiciled UK resident or “relevant person” with offshore funds to invest.
The conditions relating to “relevant person” connected to the investor have wide scope, with no exclusions to the relief for individuals (“relevant persons”) “connected” with the investee company. This means that the investment can be:
- A wholly owned company of the investor;
- The employer company of the investor;
- An investment by the individual’s spouse, a trust of which they are a settlor, or a non-UK resident company of which they are a shareholder.
All these qualify for the relief since the remittance of the funds can be by an individual or a “relevant person”. There is also no requirement for the investee company to be UK incorporated.
The investor can be associated with the target company in which they intend to invest, and can receive a salary “at arms’ length”, but otherwise cannot benefit in terms of property, goods or capital.
Case Study 5: Two-year AND 45-day rule and drawing a salary "at arms' length"
In March 2012 Renata is invited to invest some money in a private limited company. The company expects to start trading commercially in the near future. Renata has been a remittance basis taxpayer for a number of years and decides to invest £500,000 of her foreign income and gains. On 6 April 2012 Renata transfers the money to her UK bank account and on 1 May 2012 (25 days later) she makes her investment in the company. In return for this investment Renata is issued with shares in the company and she becomes a working director of the company, receiving a salary at a market rate.
The company commences trading on 1 June 2012. The investment was made within 45 days of Renata bringing her foreign income and gains to the UK and the company began commercial trading within two years of the investment having been made. As both these conditions are satisfied, Renata’s foreign income and gains qualify to be treated as not remitted to the UK.
Renata is in receipt of a salary for her work as a director and, because the company is profitable, she and other shareholders are paid a dividend on 31 July 2013. These payments would reasonably have been expected to be made to any other similar director and shareholder of the company and so are not benefits of either property, goods or capital. Renata’s foreign income and gains continue to be treated as not remitted to the UK.
There is no limit to the amount of business investment relief available.
BIR investments can be combined with other business initiative schemes such as the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), if the intended target business meets the requirements. Read more about SEIS or EIS, and R&D here. The BIR investment can also replace existing funding from UK sources.
On disposal of the investment, CGT would be due, but not if the funds that were invested are paid back offshore, in which case they remain tax free within a limit of 45 days (or 90 in some circumstances agreed with HMRC).
Case Study 6: Capital Gain and failing to take funds offshore
Adam calculates that he is able to make a tax deposit of up to £325,000 in respect of a capital gain that accrued on a partial disposal of a qualifying investment made entirely from his foreign income; he makes a tax deposit of the full allowable amount. A few months later, realising that his final Capital Gains Tax liability will not be this large because of losses, Adam withdraws £120,000 and immediately takes it offshore. When Adam submits his tax return his final CGT liability is £198,000. He instructs HMRC to use the tax deposit to settle this liability, and requests return of the balance of £7,000. He uses the refund to buy a jet ski in the UK. As Adam has failed to take the surplus tax deposit (of £7,000) offshore, the £7,000 foreign income is treated as having been remitted to the UK.
BIR investments can be made into any eligible non-listed private limited company (a plc is one not quoted on a recognised stock exchange, but AIM and ISDX Growth Markets are not considered as stock exchanges). Investments can be in the form of shares or loans made to plcs (not partnerships or sole traders). The company must be one of three types:
- An eligible trading company whose activities (or substantially all of its activities) are in a commercial trade (including rental property) or in research and development;
- An eligible holding company that holds more than 51% of the shares in at least one eligible trading company;
- An eligible stakeholder company; that is, a plc that exists for the purposes of making investments in eligible trading companies.
Case Study 7: Eligible target investment company
Franco is a remittance basis taxpayer who intends to invest £100,000 of his foreign income and gains in SLK Limited, a company which produces electronic components for a well known car manufacturer. The company is a private limited company not listed on a recognised stock exchange and is carrying out a commercial trade. SLK is therefore an eligible trading company for the purposes of BIR.
The target company must use the investment in a qualifying trade within two years of receiving the investment.
Where a relevant person enters into a loan agreement which authorises the company to draw down separate amounts over a period of time, the individual cannot claim BIR on the entire loan on the basis of the agreement. Instead, each amount drawn down is treated as a separate loan and a separate investment.
Case Study 8: staging or “drawing down” the investment
Sonia is a remittance basis taxpayer who has decided to use some of her foreign income to make a qualifying investment in a target company. She makes her investment in the form of a £1 million loan. On 1 March 2013 a loan agreement is signed and the target company draws down an initial installment of £250,000 on 31 March 2013. The balance of the loan remains offshore. Sonia has invested the £250,000 of her foreign income in the target company within 45 days of bringing the money to the UK. The funds are treated as not remitted to the UK, provided she makes a claim for the relief for this initial instalment by 31 January 2015. Sonia will need to make further claims to relief whenever the company draws down further amounts under the loan agreement.
What could possibly go wrong?
There are of course a number of legislative clauses to navigate to obtain BIR and that it continues to be available throughout the life of the investment.
Three possible pitfalls are:
- Either the remitted funds must be invested within 45 days or they must be returned offshore to avoid a taxable remittance (see Examples 3, 6)
- Without careful monitoring the non-dom may find that an investment previously qualifying for relief no longer qualifies because a “chargeable event” has occurred. If mitigation steps are not taken in these cases within a specified period, a tax charge will arise on the remittance (see Example 4).
- Care must also be taken to ensure the funds are remitted to the UK by either the individual or a relevant person. If the funds are remitted by any other person the relief will be denied. Attention must therefore be given to which party brings the funds to the UK.
HMRC Clearance HMRC provide a statutory clearance procedure to provide advance assurance that an investment will qualify for the relief. This is not mandatory, but DNS do advice seeking clearance, particularly where there is any doubt over a transaction. HMRC have a specialist team working on clearance applications and providing prompt responses.
Can DNS help? Definitely, DNS can help whether you intend to invest or would like to get your business ready for a potential investor. Whether you intend to invest or attract investment, getting advice relating to the possible tax advantages and tax implications is essential. Read HMRC’s BIR checklist and contact your account manager to go through the fine detail should this be of interest to you.