Although introduced in april 2012, there seems to have been little take up of this highly valuable relief. this article serves as a reminder of the potential tax savings that can be made, but as ever, there are traps for the unwary and it is important that any investment is structured carefully to secure the relief.
Business Investment Relief (BIR) was introduced to encourage investment in the UK and has significant benefits for non-UK domiciled individuals who may have built up substantial sums offshore.
It enables non-UK domiciled individuals who claim the remittance basis to bring offshore funds into the UK free of tax. It should also not be forgotten that an investment that qualifies for BIR could also qualify for Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) relief providing the investor with potentially substantial tax savings if the investment is structured correctly.
For example, if a UK resident but non-UK domiciled individual makes a taxable remittance of foreign income to the UK of £250,000, this would potentially be taxable at the top rate of tax of 45% and tax due of £112,500.
However, if the funds are used for an investment where the same remittance can be made free of UK tax, the qualifying conditions are met for BIR. If the investment is also a qualifying EIS or SEIS investment, further Income Tax Relief could be due at either 30% or 50% of the amount invested. So following on from the above example, a qualifying EIS investment would also secure £75,000 of tax relief. The total tax relief would amount to £187,500 (£112,500 plus £75,000) on the investment of £250,000 – 75% tax relief!
The relief applies to subscriptions for shares in a qualifying company or the making of a loan to a qualifying company.
The broad principles of the relief are as follows:
- The qualifying investment must be made within 45 days of the remittance of the offshore funds to the UK. A claim for relief must be made before the 1st anniversary of the 31 January following the tax year in which the remittance is made.
- A qualifying company must be a ‘private limited company’ (i.e. not a partnership or a company whose shares are listed on a recognised stock exchange).
- The company must be an eligible trading company.
It should be noted that for BIR purposes only, investment into a property development or rental company also qualifies for relief. The relief also applies to eligible stakeholder companies or eligible holding companies.
- No related benefit can be received as a result of the investment, although it is still possible to extract value from the business provided it is on arms length terms in the ordinary course of business.
- Where there are disqualifying events or the shares are disposed of, there is a 45 day grace period whereby the individual may repatriate or re-invest the amount of the original remitted income or gains (or the disposal proceeds if lower).
- It is possible to utilise the relief to invest in a company which the investor is already shareholder.
On a sale any capital gain is taxable in the normal way, but if the shares purchased were qualifying EIS shares and held for the minimum holding period of three years then the capital gain could also be exempt. Alternatively, the shares could qualify for Entrepreneurs Relief, meaning a rate of capital gains tax of 10%.
There are also potential Inheritance Tax (IHT) savings to be made. If the investment is of unquoted trading company shares held for a minimum of two years, business property relief potentially gives 100% relief for IHT purposes.
Although the remittance and UK investment needs to be structured properly, BIR really does offer an exciting opportunity for the non-UK domiciled entrepreneur.