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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.
What tax advantage does BIR offer investors?
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 £60,000 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.
Statutory Residence Test
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”.
Business Investment Relief
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 have 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
Fu 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 brought £300,000 foreign income to the UK intending to invest in an eligible trading company MKK Limited. Before Paulo makes the investment, MKK informs 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 transferred £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 brought £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 received 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 invested a further £100,000 of her foreign income and received 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 sold its trade to an unrelated third party and became 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.
