IN425 - The Potential Tax Efficiencies Offered by UK Business Investment Relief for Non-UK Domiciled Individuals
What is UK Business Tax Relief and What are the Tax Advantages?
UK Business Investment Relief (BIR) was introduced in 2012.
The key advantages provided through BIR are:
- A non-UK domiciled individual who is taxed on the remittance basis can use ‘idle’ overseas funds in the UK, as long as the remittance is channelled into a qualifying investment with a qualifying underlying UK commercial activity. Where the conditions for BIR are satisfied there will be no UK tax on that ‘remittance’.
- Income produced by the investment and any gain on disposal would still be subject to UK tax in the normal manner. However, as long as the underlying capital (i.e. the original foreign income and gains) is transferred out of the UK within 45 days, this amount is not subject to tax.
What are the Criteria for Qualifying Investments?
An investment can be in the form of either equity or debt. In either case, the investment must be made in a private limited company and it cannot be made in an unincorporated entity, such as a partnership or sole trader business.
The company must be one of three types:
- Eligible trading company: a company whose activities (or substantially all of its activities) are carrying on or preparing to carry on a commercial activity (see below) or carrying out research and development; OR
- Eligible holding company: a company which holds more than 51% of the shares in at least one eligible trading company; OR
- Eligible stakeholder company: a private limited company existing for the purpose of making investments in eligible trading companies.
An investment cannot be made in a company quoted on a recognised stock exchange. For these purposes an Alternative Investment Market listing does not constitute a listing on a recognised exchange.
The target company must use the investment in a qualifying trade within two years.
- Commercial Activity
An interesting feature of the relief is that both property development activities and rental businesses qualify for the relief.
This opens up the prospect of investing in many projects which would not qualify for other types of relief that are available in the UK, for example Enterprise Investment Scheme or SEED Enterprise Investment Scheme, where most asset backed opportunities are excluded.
- Connected Companies - Not Excluded
There is no prohibition on investing in a business in which one already holds a stake (even if that stake is 100%). Again, this provides some interesting opportunities.
For all companies, however, investors under BIR should ensure that they do not make an ‘extraction of value’ from the company. If this were the case, the full amount of the investment could become taxable.
Claiming the Relief
The simplest situation where relief might be claimed would, for example, be an individual bringing funds from their overseas bank account. In this case the individual is making the claim. However, any ‘relevant person’ under the remittance basis rules may make a claim.
This means that a non-UK company or a non-UK trust can make a claim where the UK investment would otherwise result in a remittance.
A useful feature of the relief is the ability to obtain advance tax clearance from HMRC in respect of a proposed investment.
There may be commercial reasons where it might be difficult to apply for clearance, for example, when there is limited time available. However, at Dixcart, we have found the UK Government department dealing with clearances to be helpful and relatively quick in turning cases around.
Interaction with Other UK Tax Reliefs
It is entirely possible for a UK BIR investment to also qualify for other UK reliefs, such as Enterprise Investment Scheme (EIS) and Seed EIS. Additionally, it might also be the case that if the EIS qualifying BIR investment is held for three years, any sale may be exempt from capital gains tax.
Please speak to Dixcart for further information regarding these additional UK tax reliefs.
There may also be an overlap with business property relief (BPR). If the BIR investment is, for example, an equity investment, the shares may also qualify for BPR after two years. However, one notable exception will be if the underlying activity of the BIR investment is a rental business, in which case BPR will not be available. Again, please speak to our Dixcart office in the UK for more information regarding BPR.
Applications for this relief have been relatively disappointing. The general reason for this seems to be a lack of awareness about Business Investment Relief.
Attractive tax efficiencies are available through BIR and non-UK domiciled individuals should review and evaluate if there is potential for them to take advantage of these tax efficiencies.
If you would like further information on this subject, please contact Paul Webb: email@example.com at the Dixcart office in the UK, or your usual Dixcart contact.