Business investment relief

The 2012 Finance Act introduced provisions giving relief from tax under the remittance basis for non-domiciled UK taxpayers who bring funds to the UK, on or after 6 April 2012 to make 'qualifying investments'. The use of this relief has increased since then among the entrepreneurial non-doms. It has proved very popular in new property investment and development businesses.

The relief allows UK resident non-domiciled individuals to remit overseas income and gains to the UK to invest in eligible businesses, without investments being treated as a taxable remittance.
It applies to a qualifying investment made using overseas income that arose in any year in which the individual claimed the remittance basis, irrespective of whether the individual is still taxed on that basis in the year the money is brought to the UK.

The individual must use the remitted money or other property concerned to make a qualifying investment within
45 days of it being remitted to the UK. If all or part of the funds brought to the UK for investment are not used for that purpose, it will not be treated as remitted provided it is taken offshore again within the 45 day period.

A claim to the relief must be made by the first anniversary of 31 January following the end of the tax year in which the remittance is made, e.g. for 2014/15, by 31 January 2017. Although in practice the relief is usually claimed on the taxpayer's tax return in the year in which the investment is made.

Qualifying investments

The investment must be made in a company in return for an issue of shares or securities, or a loan. Shares may be ordinary shares or preference shares,
but they must have been subscribed for; they cannot be bought from an existing shareholder. An investment is a qualifying investment if two conditions are satisfied.

Conditions

The company must be an unlisted, eligible trading company; shares quoted on exchange-regulated markets such as AIM or PlusQuoted will qualify. The company must also be carrying on at least one commercial trade, or be preparing to do so in the next two years, and the carrying on of commercial trades must be all, or substantially all (80 per cent or more) of what it does or is expected to do.

The second condition is that neither the taxpayer nor any relevant person, such as a spouse, a minor child or grandchild, has obtained or become entitled to obtain any 'related benefit', whether directly or indirectly. A 'benefit' is anything that would not be provided to the taxpayer or relevant person in the ordinary course of business, or would not be provided on such favourable terms.

A 'related benefit' is a benefit that (whenever obtained) is directly or indirectly attributable to the making of the investment, or one that it is reasonable to assume would not have been available in the absence of the investment. Payments of salary, dividends or loan interest received by the investor will not be relevant benefits, if they are such as any similar employee or investor might reasonably expect to receive. However we do not yet know how HMRC will interpret the legislation and in theory, a benefit of any amount could result in the whole remittance becoming taxable.

Withdrawal of the relief

If relief is given and a 'potentially chargeable event' subsequently occurs, the amount of the investment (or the relevant portion of the event does not affect the whole investment) is treated as remitted to the UK at the end of the 'grace period' unless 'appropriate mitigation steps' are taken within that period.

There is a chargeable event if:

• the company ceases to be an eligible company, for example, if an eligible trading company becomes listed or ceases to trade;

• the taxpayer disposes of all or part of the investment;

• value is extracted from the company or a related company (or from any other person in connection with the investment in question or a related investment) for the benefit of the taxpayer or a relevant person; or

• the company is non-operational two years after the investment was made, or becomes non-operational thereafter

Events do not count as potentially chargeable if they are due to formal insolvency procedures taken for genuine commercial reasons. This does not prevent the extraction of any value in connection with the insolvency procedures from a potentially chargeable event.

Appropriate mitigation steps

If the potentially chargeable event is a disposal of all or part of the holding, the requirement to take appropriate mitigation steps is met if the whole of the proceeds are either taken offshore or reinvested. Proceeds are 'reinvested' if they are used by the taxpayer to make another qualifying investment in the same or a different company, or if they themselves constitute such a qualifying investment (for example, on a share for share exchange). In the case of reinvestment,
a further claim to the relief must be made within the normal time limit.

For other potentially chargeable events the requirement is met if the investor disposes of the entire holding in the company and deals with the proceeds as above. If only part of the holding is disposed of in these circumstances, the full amount of the original investment will be treated as remitted to the UK.

The grace period

Where the potentially chargeable event is one that requires the investor to dispose of their holding, that must be done within a grace period of 90 days, which normally begins with the day on which the investor became aware, or ought reasonably to have become aware, of the event. The date on which an individual ought reasonably to have become aware of an event may not always be clear-cut. There may be practical difficulties in identifying the date, and the facts of the matter may be open to different interpretations by different parties. Where the chargeable event is the extraction of value, the period runs from the day on which the value is received.

After a disposal there is a grace period of 45 days for the proceeds to be taken offshore or reinvested, beginning with the date on which the proceeds first become available to the investor. This applies whether the disposal is itself the potentially chargeable event or is the required mitigation step in relation to another such event.

Conclusion

Business investment relief (BIR)provides a valuable incentive for investment in unlisted companies, as the ability to remit funds to the UK tax-free is attractive for non-domiciled individuals looking to invest in the UK.

The relief has proved valuable for individuals investing in both UK property rental and property development businesses. Unlike other tax reliefs, for BIR purposes, trade includes property rental businesses and property development businesses, whether they involve commercial or residential property. The BIR also extends to investments made in companies operating hotel businesses and there is no limit on the amount of funds that can qualify for relief.

A claim for BIRwill not preclude a claim for other tax reliefs, such as those under the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS). However, an individual investing in a business generating income from land is unlikely to also qualify for EIS or SEIS relief due to the differing definitions of what constitutes a trade.

When looking to take advantage of business investment relief, it is important to be aware that where relief is given and subsequently withdrawn, the individual is not simply restored to the position they would have been in if they had not claimed the relief in the first place; they will be taxed on remittances which they might well not have considered making if the relief had not encouraged the investment concerned.

If, for example, a company changes its activities so that it ceases to be an eligible trading company, the taxpayer will have to dispose of their holding within 90 days of the time when they 'became aware or ought reasonably to have become aware' of the facts, and will then have to take the proceeds offshore (or reinvest them in another eligible company) within a further 45 days. In addition to the potential for disputes over when the investor became aware of the facts, it may be a disadvantageous time to dispose of the holding from a commercial point of view, or it may be difficult to find a buyer.

The relief will therefore perhaps be most attractive to taxpayers who can expect to exercise a significant degree of control over the companies in which they invest, to minimise the risk of the unexpected withdrawal of relief. It should be remembered that BIR claims were first made on 2012/13 tax returns, and we are only now beginning to see how HMRC are applying this legislation.

Steve Wheeler is a partner at Moore Stephens