Business investment relief (BIR) is a valuable relief available to remittance basis users (RBUs), which allows them to make a tax-free remittance of their overseas income and gains to the UK, as long as those funds are used for a commercial investment in UK business.
What is the remittance basis?
UK taxpayers who are neither domiciled or deemed domiciled in the UK are able to pay tax on the remittance basis, which broadly means that they are subject to UK tax on their UK source income and gains on an arising basis, but not on foreign income and gains unless they remit them to the UK (at which point they will be subject to UK tax). This can allow RBUs to grow their offshore investments free of UK tax and mitigate UK tax.
What is business investment relief?
BIR was introduced by the Finance Act 2012, and by December 2016 £1.5 billion of investment had been made using it. Whilst at first there was a slow uptake in claiming the relief, reforms in 2017 made the relief much more attractive to non-domiciled investors. The Government is now considering further expanding the relief as part of its patient capital review.
The relief is aimed at RBUs who hold foreign income or capital gains that they wish to invest in commercial enterprise within the UK, who, but for BIR, would otherwise be dissuaded from doing so due to the tax that would be triggered. It provides RBUs (and other “relevant persons”) with a means of efficiently investing in UK business whilst realising the Government’s aim of stimulating overseas investment in UK business.
How does the relief work?
The investment must be made through either share or loan capital, in a limited company that is not listed on a recognised stock exchange and whose activities substantially comprise trading; developing or letting property; or research and development (such investments are termed “Qualifying Investments”).
It is not just the RBU themselves who can make the investment, other “relevant persons” closely connected to him/her can also do so and still benefit from the relief. This includes their spouse/civil partner, a close company in which the RBU is a member, or a trust of which the RBU or persons connected to him/her are beneficiaries.
This provides an opportunity for the trustees of an offshore trust to make a UK investment directly on behalf of an RBU beneficiary and claim the relief. It is important when considering claiming the relief in relation to a trust investment to ascertain whether there are any potential UK inheritance tax implications of UK situs investments.
There is no limit on the amount of relief, but just like the remittance basis, it must be claimed in the RBU’s tax return. Where the RBU first brings the funds to the UK before investing, they have 45 days to apply those funds in a Qualifying Investment for the relief to apply.
The burden of proof lies with the individual claiming the relief to show that the qualifying conditions are met. However, to provide assurance to potential RBU investors, the Government provides a voluntary pre-clearance procedure whereby RBUs seeking to claim BIR can use HMRC’s advance assurance for BIR. This procedure (which typically takes around 30 days) enables RBUs to seek HMRC’s view on whether the proposed investment would be a Qualifying Investment.
Terminating the relief and reinvestment
BIR continues while the Qualifying Investment continues to be held, and it will terminate upon the Qualifying Investment being disposed of. Termination can also be triggered where:
- The investee company ceases to represent a Qualifying Investment;
- The investor (or a relevant person) benefits from the investment either directly or indirectly (excluding arms-length payments such as dividends); and
- The investee company remains non-operational for five years after the investment was made.
Where the Qualifying Investment is disposed of, the proceeds will not automatically trigger a charge to UK tax under the remittance basis. The taxpayer is given a 45-day grace period in which the proceeds can be either taken back offshore or otherwise reinvested in another Qualifying Investment, thus allowing the relief to be revived.
BIR is an attractive and often overlooked opportunity for RBUs to tax efficiently invest in UK business. It is especially appealing due to the lack of any limitation on the size of the investment, and the fact that it does not prevent the taxpayer from claiming other relevant reliefs.
That being said, without appropriate technical advice, it can be difficult to navigate the array of conditions, disallowing provisions and broadly drafted anti-avoidance mechanisms. Where these are not complied with it has the potential to create an unplanned taxable remittance for the RBU. We recommend professional advice should be obtained not only prior to making an investment but also prior to a disposal or corporate restructuring, where the relief is already in play.