Tax relief for UK investments

18 October 2016

Are non-UK domiciled individuals (non-doms) and offshore trustees making the most of the available tax reliefs to bring their untaxed offshore income and gains into the UK?  Business investment relief allows foreign monies to be remitted and invested in many UK activities, including property rental, without a charge to tax. 

The remittance of untaxed foreign income and gains by a non-dom for investment in the UK will ordinarily result in a charge to tax. That is also the case if any other relevant person, such as their spouse, trustees or their offshore company, brings money which originated from them into the UK.

However, under the business investment relief (BIR) regime, untaxed overseas monies can be brought into the UK with no immediate tax consequences if qualifying investments are subsequently made.

While, on the face of it, the idea of BIR seems straightforward, the legislation is very prescriptive and each case should be reviewed carefully, and crucially, before the movement of funds takes place. The government is currently consulting on ways BIR could be altered, and potentially expanded, to make it more accessible; encouraging investment in the UK. The consultation closes on 20 October 2016.

Basic conditions and structuring

a)  The investment can be either, a subscription for shares in, or a loan to, a qualifying company. Broadly, the company must be an unlisted UK ‘trading’ company. In this case, the term ‘trade’ includes property letting businesses.  

The investment can be made:

  • in a company whose activities are all or substantially all trading activities (ie more than 80 per cent);
  • in a stakeholder company (ie a company which exists wholly for the purpose of making investments in qualifying trading companies);
  • in a holding company that is a member of an eligible trading group (80 per cent trading), or a group that is reasonably expected to become an eligible trading group with the next two years.

b)  The investment must be made within 45 days of the remittance of monies.  

c)  No benefit can be obtained by the investor, or any ‘relevant person’, as a result of the investment.  Value can, of course, be extracted provided it is in the ordinary course of business on arm’s length terms, but the provision, for example, of an interest free loan could constitute a benefit,  so advice should be taken.

d)  If and when the investment is disposed of, which includes the partial or full repayment of a loan, the monies must be removed from the UK or re-invested in another qualifying investment within 45 days to prevent the remittance being taxed in full.

Claiming relief

A claim for BIR must be made on the relevant individual’s self-assessment tax return by 31 January following the tax year in which the investment was made. Because of the ‘relevant person’ rules, this may not need to be the same person as the one making the investment. 

When claiming BIR the onus of proof is on the individual who would be liable to tax. Appropriate evidence should be kept to support the initial claim and illustrate that the investment qualified up until disposal.

Other benefits

Investments under this regime could potentially also qualify for relief under the enterprise investment scheme (EIS) and for business property relief (BPR) for inheritance tax purposes, giving significant additional tax benefits.

Complexities

There are many areas of complexity, where it may be easy to fall foul of the BIR rules, including the ordering of disposals if a number of loans are made, and where there are non-qualifying investments in the same company.

Additionally, given the wide definition of ‘relevant person’, repayments to individuals other than the originator of the monies can also give rise to complexities and tax charges.

Importantly, if there is a small failure in meeting the conditions for relief, all of the relief can be lost. Taking advice is therefore essential.

The rules are relatively new and quite brief, which means that there are examples where the law has been tested. It is therefore essential that advice is obtained where BIR is being considered.

For more information please get in touch with Gary Heynes.