Encouraging investment
Advisers dealing with entrepreneurial resident non-doms should note the useful tax facility that can preserve their clients' capital, says Imogen Buchan-Smith
With very few exceptions, resident non-doms (RNDs) in the UK and those elected to be taxed in the UK on the remittance basis were subject to UK tax on any foreign income and/or gains they brought or were deemed to bring into the country. That was until 6 April 2012. From then, the government introduced a facility, known as business investment relief (BIR).
These individuals can now remit such funds without giving rise to an upfront UK tax charge (by treating those funds as not being remitted to the UK), provided that those funds are invested in certain 'eligible' companies. Broadly speaking, this initiative was intended to encourage investment in UK businesses and stimulate growth: to be 'eligible', the investee companies have to be private, trading UK companies (or holding companies those).
Therefore, the BIR can be a very useful tool to be aware of when advising entrepreneurial RNDs who may wish to make this type of investment, thereby preserving their 'clean' capital for other investments or expenditure in the UK that may otherwise trigger a UK tax charge for them.
Eligibility score
An RND or a person connected to them (for example, a spouse, a close company in which the RND or their spouse is a participator or the trustees of a trust of which the RND or their spouse is a beneficiary) may invest the RND's foreign income and/ or gains in an eligible company by way of:
(i) subscription (in new rather than previously issued shares) for shares in that company; or
(ii) loan to that company.
An eligible company includes any private limited company that:
(i) carries on at least one commercial trade or is preparing to do so within two years of the relevant investment (ETC)
(ii) exists wholly for the purpose of investing in an ETC/s; or
(iii) is a member of a group including an ETC/s.
Neither the RND nor a person connected to the RND may 'benefit' (either directly or indirectly) as a result of making the investment. HMRC has published guidance as to what it considers a 'benefit' in this context will be - a commercial return on the investment, such as dividends paid out of profits, or receipt of a salary at a market rate where, say, the RND is employed as a director of the eligible company should not fall foul of the BIR.
There is a cut-off period of 45 days from the date of remittance of funds to the UK for investment of those funds for them to be BIR-eligible.
The BIR needs to be claimed by the RND no later than the first anniversary of the 31 January following the end of the UK tax year in which the investment was made. But HMRC offers a pre-clearance facility (by way of the CAP1 service) to provide RNDs with comfort that the funds that they are proposing to invest will indeed qualify for the BIR. In my experience, the HMRC team that deals with this facility is very responsive, which is, of course, an important factor in the context of these types of investments.
Trigger points
There are a number of trigger points on which the invested foreign income and/or gains will be deemed to be remitted to the UK if certain 'mitigation' steps (namely a transfer of the relevant funds offshore or reinvestment in another eligible company) are not taken prior to the expiry of a grace period, which include:
(i) sale of an investment
(ii) the liquidation/ dissolution of the company
(iii) the company not commencing trade within two years of the investment; and
(iv) a listing of the eligible company.
Therefore, a key factor to investing funds in this way is ongoing due diligence in relation to the investee company to ensure that there isn't an unknown trigger event. It will also be important to ensure that funds can be easily extracted on the occurrence of such an event (although regulations were introduced last year that allow HMRC to extend the applicable grace period on a listing of a company that has a lock-up agreement preventing extraction of funds within the specified time period).
The investee company may also be a close company by reference to the RND making the investment, thereby making the company itself a connected person. There was general concern that the actions of the investee company could trigger a remittance for the RND, but HMRC has now published guidance indicating that where the investee company subsequently uses the funds in the ordinary course of running the business, for example to purchase stock or to pay employees, such use should not be treated as a remittance.
Other reliefs
The objective of the BIR may sound familiar in the context of the enterprise investment scheme (EIS) and the seed enterprise investment scheme (SEIS) and, indeed, BIR could also apply in relation to investment by RNDs in EIS or SEIS companies. Many restrictions that apply in relation to EIS and SEIS, for example regarding the receipt of a benefit from the relevant company, mirror the BIR provisions, for example prohibition of related benefits.
Therefore it is likely that if a company qualifies as an EIS or SEIS, it will similarly qualify for the BIR; although, conversely, the pool of investments that may qualify for BIR may be a lot wider than those that would qualify as EISs and SEISs as the trade conducted by these companies is restricted in a way that those potentially eligible for BIR is not. However, the mechanics for investment and the company structure must be reviewed in light of the BIR conditions.
BIR does require a more hands-on approach to investing in UK companies and the availability of this relief needs to be reviewed on a case-by-case basis. However, this may be a relevant and useful relief in the context of investments that are subject to restrictions and ongoing due diligence in any case, such as EIS and SEIS, or in which an RND has an active interest or involvement, such as a family business.
Imogen Buchan-Smith is a solicitor at Penningtons