Business Investment Relief (BIR) for non-UK domiciliaries (Non-doms) – Part one
In the past, as exemplified in the recent Summer Budget, changes to the remittance rules have generally limited the scope for a non-UK domiciliary to bring foreign income or gains to the UK without incurring UK tax.
Against this tide, was the introduction (in 2012) of BIR for remittance basis users. It was, and remains, an attractive relief and we therefore widely welcomed. However, it is a relief that, at least anecdotally, seems to have been less widely utilized.
This note considers how the relief works, and some of the associated practical wrinkles.
How does it work?
Historically, the fact that remittance basis taxpayers are liable to UK tax on any foreign income and gains (FIG) they bring to the UK has operated as a disincentive for such persons to invest in the UK. Whilst the funds were left offshore it remained outside of the scope of UK tax, however, in terms of his UK activities, this was ‘idle money’ for the Entrepreneur.
In a bid to encourage investment of this money in the UK, the hard up Chancellor introduced a new relief with effect from 6 April 2012.
In short, the relief provides that a remittance will not trigger a tax charge if a ‘remittance basis user’ brings his FIG to the UK to make a commercial investment.
However, before you get too excited (!), it is important to note that this is not a washing machine that converts FIG in to “clean capital” for the purpose of the remittance rules. Instead, the funds retain their original character and may be taxable at a later date if the relief ceases to apply.
What are the conditions?
To qualify for relief, the investment must be made:
- in a qualifying company;
- in the form of a loan or share subscription; and
- within 45 days of the foreign income or gains being brought to the UK
It should be noted that the shares must be subscribed for. Therefore, a straight purchase of shares from an existing shareholder will not qualify for the relief.
However, the terms of a permitted investment are, perhaps surprisingly, quite flexible.
For instance, there is no limit on the amount of funds that can qualify for relief and a share investment is not restricted to ordinary shares, but also extends to shares with preferential rights.
What is a qualifying company?
The following types of private limited companies are treated as “qualifying”:
- a company carrying on a commercial trade;
- a company that exists for the purpose of making investments in eligible trading companies; and
- a holding company (being a member of a trading group of private limited companies) with a 51% eligible trading company subsidiary.
The relief can apply to investments made in companies quoted on exchange-regulated markets (eg AIM) as well as investments made in foreign companies.
What constitutes a commercial trade?
A commercial trade is one whose activities are conducted on a commercial basis and for the purpose of making a profit.
Any activities treated as a trade for corporation tax purposes will, unsurprisingly, also qualify under the relief.
The surprising bit is that the definition of “trade” for BIR is extended to include both of the following:
- a business generating income from land. This includes profits arising from the residential letting as well as commercial property; and
- a company carrying on research and development activities which are intended to lead to a commercial trade.
Are there any general conditions on the relief?
BIR will not apply if the investor, or a connected person, receives a benefit that is related to the investment.
This excludes anything provided in the ordinary course of business on arm’s length terms, or anything that is subject to income tax or corporation tax.
Who makes the investment?
It is worth noting that the investment does not necessarily have to be made personally by the Non Dom. For instance, it could be made via either an offshore trust or company instead.
Is there any clearance procedure for BIR?
Yes, and again, this is a helpful feature of BIR. This allows the investor to request a ruling from HMRC as to whether they think a proposed investment will qualify for relief.
In view of the limited 45-day window for making the investment, we would strongly recommend that clearance is applied for before bringing the funds to the UK.
Does a Non Dom have to claim BIR?
The relief must be claimed in the investor’s UK tax return no later than 31 January after the end of the tax year following that tax year in which the funds would have otherwise been treated as remitted to the UK.
This is the case even if the investor would not otherwise have needed to file a tax return for that year.
Are there any circumstances where there may be a clawback of BIR?
The relief may be withdrawn if:
- the investment is sold;
- the investor receives a benefit related to the investment (as described above).
- the company ceases to be a “qualifying” Company.
In such circumstances, the original invested funds must either be:
- reinvested in a qualifying investment; or
- shifted offshore within the appropriate 45 day grace period
Where this happens there should be no tax charge.
So this blog has looked at the nuts and bolts of what is clearly an attractive relief. The next part will consider a couple of interesting thoughts I have had in relation to BIR and how it can be used to achieve additional benefits. Stay tuned.