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Busting the Brexit blues with tax and investment incentives

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

OK, this is a tenuous Brexit related article – but it’s the only one in we’ve done so please do entertain our folly.

Of course, on Friday the 24th the doomsayers were expecting a flight of capital, investment and people from the UK. This does not seem to have happened just yet (though, it is worth pointing out we haven’t yet left the EU!) and, due to a drop in the value of Sterling, there appear to be opportunities for those outside the UK to invest in our nation cheaply – whether in businesses or property.

How are tax reliefs and other Government incentives potentially helping this?

 

Business Investment Relief (“BIR”)

This tax relief is relevant to UK resident non-domiciled individuals (Non-doms) who are on the remittance basis of taxation. This method of taxation essentially affords non-doms the privilege of holding their foreign income and gains offshore without suffering any UK tax. However, if they decide to bring those funds to the UK (a remittance) then the underlying income and gains will suffer tax in the absence of any reliefs.

In short, BIR allows such a non-dom to use what are otherwise ‘idle’ funds (from a UK perspective, anyway) held overseas in the UK without a tax charge. However, to qualify for the relief, the investment must be in a prescribed form and into a qualifying UK commercial activity.

The investment can be in the form of either equity or debt. In either case, the investment must be made in to private limited companies (partnerships and sole traders need not apply).

The company must also be one of three types:

  • Eligible trading company – one whose activities (or substantially all of its activities) are carrying on or preparing to carry on a commercial activity (including renting property) or carrying out research and development;
  • Eligible holding company – a company which holds more than 51% of the shares in at least one eligible trading company;
  • Eligible stakeholder company – a private limited company which exists for the purpose of making investments in eligible trading companies.

In this regard, a private limited company means one which is not quoted on a recognised stock exchange. AIM and ISDX Growth markets are not considered as stock exchanges for these purposes.

Of course, the fear is that with yet another overhaul of the non-dom rules taking effect from 6 April 2017, and Brexit, there may well be a stampede of non-doms to the departure lounge at Heathrow!

 

Tier 1 Investor Visas

Many wealthy international citizens enter the UK via the Tier 1 (Investor) Visa. But what is it?

The scheme is designed to allow High Net Worth Individuals (“HNWIs”) who make a substantial investment in the UK to enter the UK. The applicant must invest a minimum of £2 million in the UK.

The HNWI must invest for a minimum of 5 years in the UK by way of:

  • UK government bonds;
  • Acquiring shares in active UK trading companies;
  • Obtaining loan capital in active UK trading companies

Unlike BIR above, investment in property investment, development and management are excluded from the scheme.

Investors are allowed to work or study under the scheme.

The HNWI must make the UK their main home and must spend the majority of their time in the UK.

The applicant will initially obtain their visa for 40 months and must make their investment within 3 months of entry into the UK.

After this initial period, the investor must apply for an ‘extension of stay’. The UK government will grant a two year extension of stay to the whole family if the HNWI has continued to satisfy the conditions of the scheme.

The scheme has evolved such that it now provides the ability to achieve ‘Indefinite Leave to Remain in the UK (“ILR”)’ where a higher level of investment is made. Where the investment is £5 million or more then ILR is reached within 3 years. Where the investment is between £5 million and £10m then ILR will be granted after 2 years. Both of these compare favourably to the usual 5 years required for ILR.

It is important to know that only the main applicant will have his/her route to permanent residence fast tracked through higher level of investment; their dependents (spouse and children) can only apply for permanent residence after living for 5 years in UK.

The Government has clearly set out its stall with this visa regime. If one is prepared to invest enough money in the UK then one can fast track his or her passport.

One should also be aware that there is an alternative track for entrepreneurs known as the Tier 1 (Entrepreneur) visa with different requirements.

 

Enterprise Investment Schemes (EIS) and Seed EIS schemes – interaction with these incentives

Both EIS and Seed EIS are Government approved tax reliefs that provide attractive income tax and capital gains tax reliefs for individuals investing in growing trading companies.

Both schemes require an individual to subscribe (with cash) for newly issued shares in a trading company. That Company must not participate in an excluded activity. For instance, property investment and development are both excluded business activities for the purpose of both reliefs.

The main EIS scheme provides for income tax relief of 30% on a qualifying investment (up to £1m per year) which takes effect as a tax credit which is deducted at the end to the tax calculation. The Seed EIS scheme, which operates for smaller companies, provides relief of up to 50% on investments capped at £100k in a year.

Where the shares are held for three years then a gain on the sale of the shares is exempt from tax.

Both provide for CGT relief where an individual has crystallised a gain on a disposal but he or she decides to reinvest the proceeds in to a qualifying investment.

It should be noted, that these are not reliefs which are targeted at overseas investors at all. However, they do interact with both BIR and the Tier 1 regime.

EIS and Seed EIS investments are likely to be qualifying investments under the Tier 1 (investor) requirements. This is because they will always be equity-based investments in UK trading Companies. Of course, for the sums involved in obtaining the visa, it will not be possible to obtain income tax relief on the full investment as £2m exceeds the subscription limits for both. Depending on whether they have income in the UK, it may well be that they do not have the income tax liability to ‘frank’ any tax relief – although it is possible to work under such a visa so the value of any income tax relief will be very much a case-by-case basis.

Similarly, an investment in an EIS or Seed EIS company might also qualify for BIR.

Of course, an investment may qualify for either BIR or Tier 1 but may not qualify for EIS or Seed EIS. For example, in the former because the underlying asset is property and the latter because the investment is, say, debt based.

 

If you have any queries over this article then please do not hesitate to get in touch.

 

 

 

 

 

 

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