Business Investment Relief (BIR) is aimed at individuals who are residents but not domiciled or deemed domiciled in the UK who claim the remittance basis of taxation.
The relief allows a remittance basis user to invest foreign income and gains in UK companies without triggering a tax charge.
The rules governing the relief are found in ITA 2007, ss. 809VA-809VO.
The Target Company
For the relief to apply, the funds must be invested in a company that is (s. 809VD):
- An eligible trading company;
- An eligible stakeholder company;
- An eligible hybrid company; or
- An eligible holding company.
The activities of an eligible trading company comprise trading, developing or letting property, or research and development.
An eligible trading company is one that carries on one or more commercial trades or is preparing to do so within the next 5 years, and carrying on commercial trades is all or substantially all of what it does (or of what it is reasonably expected to do once it begins trading) (s.809(VD)(3).
The business of generating income from land is treated as a trade for these purposes and “generating income from land” means exploiting an estate, interest or right in or over land as a source of rents or other receipts.
An eligible holding company is a company that is a member of an eligible trading group or an eligible group that is reasonably expected to become an eligible trading group within the next five years.
Group for these purposes means a parent and its 51% subsidiaries.
A company is an eligible stakeholder company if it exists wholly for the purpose of making investments in eligible trading companies.
An eligible hybrid company can make investments in eligible trading companies but can also carry on a qualifying trade or trades.
The investment can be made through either the subscription or purchase of shares in or a loan to the company.
The target company must be a Private Limited Company. This means that none of the company’s shares are listed on a recognised stock exchange. Therefore, AIM shares are allowed.
The term “Limited Company” requires that the company be a body corporate with limited liability. Limited liability partnerships are excluded by s 809VD(11)(b).
An investment cannot be qualifying if the investor obtains or is expected to obtain related benefits.
A benefit is considered “related” if it is attributable to the making of the investment or would not have been available without the investment (s. 809VF(3)).
This condition is not intended to prevent a relevant person (the investor) receiving benefits that are provided on arm's length or commercial terms.
This includes the receipt of a commercial salary as an employee of the target company and the receipt of dividends or interest in respect of rights as a shareholder in, or a lender to, the target company.
Therefore, anything that would not be provided to the investor in the ordinary course of business or would be provided on less favourable terms would be a related benefit and would jeopardise the claim to relief.
It is important to note that these provisions also apply if the person receiving the benefit is a relevant person in relation to the remittance basis user.
The definition of “relevant person” is set out in Income Tax Act 2007, s 809M.
When the relief applies
The relief only applies if (s. 809VA(1)):
(a) A relevant event occurs,
(b) But for the availability of the relief, income or chargeable gains of an individual would be regarded as remitted to the United Kingdom by virtue of that event, and
(c) The individual makes a claim for relief.
A “relevant event” occurs if money or other property (s 809VA(3)):
(a) Is used by a relevant person to make a qualifying investment, or
(b) Is brought to or received in the United Kingdom in order to be used by a relevant person to make a qualifying investment.
It is important to note that where foreign income or gains are not invested directly in a qualifying company but are first brought to the UK, the relief will only apply if those funds are invested within 45 days of arriving in the UK.
In order to benefit from the relief a claim must be made in an individual’s self-assessment tax return for the tax year in which the foreign income or gains would be treated as having been remitted to the UK for tax purposes.
The relief is subject to a purpose test. It is precluded if either the investment is part of a scheme or arrangement and one of the purposes of that scheme or arrangement is the avoidance of tax.
Once the relief has been granted on an individual's foreign income or chargeable gains as a result of a qualifying investment, it will continue to apply to that income or those gains until a "potentially chargeable event" occurs.
A potentially chargeable event occurs if:
- The target company is, for the first time, neither an eligible trading company (nor an eligible stakeholder company, hybrid company or eligible holding company);
- The relevant person who made the investment disposes of all or part of the holding;
- The extraction of value rule is breached; or
- The 5-year start-up rule is breached.
The extraction of value rule (C) is breached if value in money or money's worth is received by or for the benefit of any relevant person and that value:
- Is received from any person in circumstances that are directly or indirectly attributable to the investment;
- Is not received as a result of a disposal that is itself a potentially chargeable event (for example, a disposal of all or part of the qualifying investment);
- Is not paid or provided to a relevant person on arm's length terms in the ordinary course of business and in circumstances in which the value is subject to UK income or corporation tax (or would be if the relevant person was liable to UK income or corporation tax).
When a chargeable event occurs, there are two kinds of appropriate mitigation steps:
- Reinvestment of the funds in a qualifying company;
- Taking money back abroad.
In relation to disposals the money must be taken abroad or reinvested withing a 45 day window.
In case of multiple investments, i.e. a loan made at different times, aggregation rules treat them as a single investment.
Aggregation rules are accompanied by identification rules that may tax a disposal of shares or loans which did not attract the relief as they did attract it. These rules are complex so if an individual is considering making multiple investments, or a relevant person in regard to him/her is planning to make an investment into a company, professional advice must be sought.
Income and gains attracting the relief and transferred from a mixed fund are treated as transferred under the offshore transfer rules. This means that income and gains are pro-rated into the qualifying investment rather than being identified as if a taxable remittance had occurred.
Last, it is important to remember that interest and dividends received by the investor from the UK company he or she invested in are UK source.
This means that they are subject to UK income tax and not eligible for the remittance basis.
Business investment relief is a generous tool for UK non-domiciled individuals claiming the remittance basis for bringing foreign income and gains into the UK without triggering a taxable remittance.
The relief will be most beneficial to remittance basis users with no available clean capital but it is also very powerful to those who want to use their clean capital fund for different purposes and put foreign income or gains at work in the UK if a good investment opportunity arises.
Business Investment Relief can be a powerful tool for investing foreign income and gains in the UK without triggering a taxable remittance if you are a non-domiciled individual claiming the remittance basis. Laggan-UK can help you confidently take advantage of this relief and invest in UK companies. Contact us today for more information about how we can help you.
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