Business Investment Relief
I decided to update this article as Business Investment Relief is something I have spoken to clients about quite a few times in recent weeks.
The relief, for the UK resident non-domiciled individuals for whom it is relevant, might be a useful option if they are:
- looking for a cash injection to support struggling businesses in this tough economic climate; or
- Looking to tap in to cash to acquire distressed assets or businesses
For those on the remittance basis, the relief will allow them to utilise their foreign income and gains in the UK without triggering a tax charge where the conditions are satisfied.
Indeed, Business Investment Relief was introduced following the financial crisis to promote investment in the UK by enabling UK resident non-domiciled individuals to invest overseas income and gains.
Without the relief, these funds would otherwise remain untapped from the perspective of the UK economy.
For Business Investment Relief to apply, the following conditions must generally be satisfied:
- There must be a qualifying investment– This includes making a secured or unsecured loan, or the purchase of new shares in the company. Further, the company must be a privately limited company as opposed to a publicly limited company or LLP;
- The business must be a trading company- The investment must relate to a trading business, or one that is due to commence trading within 2 years of the funds being brought into the UK. Trading is very broadly defined and will include property letting and development businesses!
- The investment must be based on commercial principles– The investor or ‘relevant person’ must not directly or indirectly receive or expect to receive any benefit from the investment, other than that in the ordinary course of business. A relevant person includes spouse, children, grandchildren trustees of a settlement where the investor is a beneficiary or participator in a close company. For example, if the investor purchased shares in a buy-to-let business, the investor, or a relevant person could not live in one of the businesses properties, other than for market rent.
It is possible to obtain clearance from HMRC that a proposed investment qualifies for the relief.
The investment must take place within 45 days of remitting the income or gains into the UK.
For the relief to apply, an investor must claim this relief through their tax return, in line with the usual conditions and applicable dates for filing a return.
If an investor is unsure whether their investment will qualify for Business Investment Relief, there is a mechanism whereby investors can seek clearance from HMRC. We have found this team to be incredibly helpful over the years as they try and encourage uptake of the relief.
The relief is a mutually exclusive relief and therefore, there is nothing to prevent an investor claiming other reliefs, such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) alongside.
Any investments made within the UK, with overseas income or gains and by a non-domiciled resident, must be carefully considered and planned, otherwise investors could unintentionally fall into the UK tax net.
Inheritance Tax (“IHT”)
The basic position is that any investments made in the UK will fall into the tax regime for inheritance tax and therefore, depending on the size of investments may be subject to 40% tax on the investments in the UK, above the £325,000 nil-rate band.
However, depending on the nature of the investment(s), there may be applicable reliefs such as Business Property Relief and Agricultural Property Relief that may apply, subject to satisfying other conditions.
As a result, investors should take advice so as to ensure funds are invested in a tax efficient manner.
Potentially Chargeable Events (PCE)
On the crystallisation of certain events, the relief will be disapplied and therefore, the income or gains remitted to the UK, will be taxable under the remittance basis.
These events are:
- A disposal of all or part of the investment, if the funds are not remitted from the UK or reinvested within 45 days;
- The company ceases to be an eligible trading, holding or stakeholder company;
- The company does not commence trading within two years;
- The investor or connected person receives a benefit or ‘value’ from the company that is outside of the usual course of business, unless this is done at arm’s length. If this occurs, then relief is clawed back in its entirety.
Business Investment Relief is an incredibly attractive relief. It is not narrowly defined at will apply to most types of commercial activity in the UK.
As such, in these difficult times, the ability to make a pot of overseas income and gains work hard in the UK might be a boost that can really make a difference.
If you, or your client, has any queries regarding Business Investment Relief or other non dom tax issues then please do not hesitate to get in touch.