28 November 2012
Finance Act 2012 introduced the new business investment relief for the remittance to the UK of overseas income and gains by non UK domiciled individuals for the purposes of qualifying business investments.
UK resident non UK domiciled individuals are subject to UK tax on their worldwide income and gains, unless they claim the remittance basis of taxation. If such individuals elect to be taxed on the remittance basis, they are only subject to UK tax on overseas income and gains that are brought to (or remitted) the UK.
Since April 2008, non UK domiciled individuals who have been UK resident for a certain period of time and elect to be taxed on the remittance basis for a tax year, have been subject to a remittance basis charge (unless unremitted overseas income and gains in the year are less than £2,000). This charge is £30,000 for individuals who have been UK resident for 7 of the last 9 tax years and £50,000 for those who have been UK resident for 12 of the last 14 years.
As a result of the remittance basis of taxation, many UK resident non UK domiciled individuals avoid remitting overseas income and gains to the UK.
The new relief
The government wishes to encourage business investment in the UK. In order to encourage non UK domiciled individuals to invest in UK businesses, business investment relief was introduced with effect from 6 April 2012. The relief allows UK resident non UK domiciled individuals to remit monies, derived from overseas income and gains, to the UK for the purposes of qualifying business investment without incurring a UK tax charge.
Some of the key points of the relief are as follows.
- An investment must be in a qualifying company (which must remain so throughout the period of investment). A qualifying company is a private limited company which carries on a trading activity. Relief is not available for investment in sole traders, partnerships or LLPs. The company need not be UK resident, although in practice it would likely be so.
- For the purposes of the relief, trading activity can include the letting of residential or commercial property for gain.
- An investment can be either in the form of shares or loans. Where the investment is in shares, these must be new shares. Acquiring shares from a third party doesn’t qualify for the relief.
- The business investment relief rules are not part of the venture capital scheme rules and so don’t have the same restrictions. For example, a qualifying investment can be an investment in a family company.
- Monies remitted to the UK must be invested in a qualifying company within 45 days.
- The income or gains remitted must have arisen in a year where the individual was subject to the remittance basis of taxation.
- Anti-avoidance rules exist to prevent an individual, or connected persons, gaining benefits from the investment. Payments (e.g. salary, dividends, loan interest) made on commercial arms length terms are acceptable.
- Proceeds received from the investment, up to the level of investment made, must be taken offshore or reinvested in another qualifying investment within 45 days of receipt. Otherwise a taxable remittance of overseas income or gains will be deemed to have been made. Profit or gains made from an investment can remain in the UK.
- There is no annual limit on the amount of business investment relief an individual can claim. The relief is not given automatically and must be formally claimed within he prescribed time limit.
- An advance assurance process is available to seek HMRC assurance on whether a proposed investment will qualify for the relief.
The business investment relief legislation is complex. The above is only a very brief summary of some of the rules.
Interaction with other tax reliefs
Claiming business investment relief in respect of an investment does not affect entitlement to other tax reliefs that could be applicable such as:
- Enterprise Investment Scheme (“EIS”) tax reliefs.
- Seed Enterprise Investment Scheme (“SEIS”) tax reliefs.
- Venture Capital Trust (“VCT”) tax reliefs
- Capital Gains Tax Entrepreneur’s Relief
- Inheritance Tax Business Property Relief (“BPR”)
Conclusion and planning opportunities
Business investment relief is a potentially very valuable tax relief.
UK resident non UK domiciled individuals are able to remit overseas income and gains to the UK, tax free, for qualifying business investments. Companies may benefit from what is effectively a new source of external investment; previously the remittance basis of taxation often prevented the remittance of overseas income and gains by non UK domiciled individuals.
The new relief provides some interesting planning options for UK resident non UK domiciled individuals. The ability to remit overseas income and gains for UK property investment or to capitalise family companies may be attractive for some. The interaction of business investment relief with other UK tax reliefs such as EIS, SEIS and VCT tax reliefs, and BPR, provides some very tax efficient planning opportunities.
The legislation is complex and individuals are advised to seek detailed advice on the availability of the relief and the planning options.
For more information on business investment relief and the taxation of non UK domiciled individuals, please contact us on 01788 539000.
Magma is a leading firm of Chartered Accountants and Chartered Tax Advisers, providing a wide range of professional advisory services to owner managed businesses and private individuals. Magma thrives on its work with entrepreneurial businesses and their people. Magma works closely with its clients, delivering proactive and innovative advice. Our focus is on building long term relationships with our clients to help them and their businesses succeed, reduce taxation and create, increase and protect wealth. Magma offers a breadth of technical expertise and specialist advisers across six integrated service areas: Audit and Assurance, Business Services, Corporate Finance, Corporate and Business Tax, Private Client Tax and Wealth Management.
This document has been prepared as a general summary. It has been written for information purposes, should not be relied upon and is not a substitute for professional advice which should be sought. This document does not constitute taxation, financial planning or investment advice. Neither Magma Chartered Accountants or any of its employees accept any responsibility for loss or damage incurred as a result of acting or refraining from acting upon anything contained in or omitted from this document. Magma Chartered Accountants is the trading name of Magma Audit LLP, a limited liability partnership (Registered in England No. OC370086). Magma Audit LLP is a subsidiary of Magma Partners LLP (Registered in England No. OC370051). The registered office of both LLPs is: Bloxam Court, Corporation Street, Rugby, CV21 2DU. Registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales. Magma Partners LLP is registered with the Chartered Institute of Taxation as a firm of Chartered Tax Advisers. A list of members is available on request.