Business Investment Relief (“BIR”) Print
Non-domiciles may remit offshore income and gains to the UK for investment in a qualifying company without triggering the tax charge that would otherwise arise on remitting these funds here. This measure is designed to encourage non-domiciles to invest in the UK, and to remove the counter-productive effect of the remittance basis rules on non-domiciles wishing to invest in the UK.
The funds brought into the UK must be invested into a qualifying business within 45 days of being remitted here. There is no restriction to the size of the investment that may be made, and investment in businesses of all size and maturity is permitted. Nor is there any restriction where the investor or other family members are connected with the business. However, the relief is restricted to investments in private limited companies which are defined as a body corporate with limited liability and none of its shares are listed on a recognised stock exchange. Investments in limited liability partnerships is specifically excluded from this relief.
All investments must be made in companies to qualify as tax-free remittances. This is seen as a method of preventing abuse of the funds for non-commercial purposes. The rules also allow investment in eligible stake-holder, or holding companies, provided that their activity is substantially the holding of shares in companies which carry out qualifying business activities. This will include private equity companies and venture capital companies where they do not have a controlling interest in the invested companies.
The investment is not restricted to share capital and allows the investment to be made by way of preference shares or loans.
BIR is available where either the individual, or a relevant person makes the investment. A Relevant person would be either his spouse, minor children or grandchildren, a trust of which the individual is a beneficiary, or a close company of which he is a participator (shareholder). The income or gains must be remitted by a relevant person, but not necessarily the same relevant parson who is making the investment, so that they would be treated as the income or gains of the individual concerned.
Qualifying investments may be made into the following different corporate structures:
- An eligible trading company;
- An eligible holding company;
- An eligible stakeholder company, or
- An eligible hybrid company.
An eligible trading company is a company which carries on one or more commercial trades or is preparing to do so within the next 2 years, and where this activity is all, or substantially all of its overall activities. Trading here means anything that is treated for corporation tax purposes as if it were a trade, and a business carried on for generating income from land. Accordingly, investment in a company carrying on the commercial letting of property, including residential property, is an eligible trade for these purposes.
An eligible holding company is a company which is a member of an eligible trading group. For these purposes a group is the holding company and its 51% subsidiaries. All of the group activities must be the carrying on of commercial trades. The investment may be made in any company within the group, and is not restricted to the holding company.
An eligible stakeholder company is a company whose sole purpose is making investments in eligible trading companies. It cannot be a trading company.
Lastly, an eligible hybrid company is in effect a hybrid between an eligible trading company and an eligible stakeholder company, but would not qualify directly as either. It is defined as a company which is not an eligible trading company, nor an eligible stakeholder company which carries on one or more commercial trades, and carrying on the commercial trade and making investments in eligible trading companies are all or substantially all of what it does.
Whilst most investments will be made in companies incorporated in the UK, investment will also be allowed in non-UK resident companies that have a permanent establishment in the UK. However, the funds must still be remitted to the UK for the investment to qualify for this relief.
The investor, or any relevant person to the investor, must not directly or indirectly obtain any benefit as a result of the investment. Benefit includes anything that would not be provided to the relevant person in the ordinary course of business or would be provided but on less favourable terms. This does not prevent the company providing anything to the relevant person in the course of its business on normal commercial arm’s length terms.
A chargeable event may occur, and the reinvested income or gains will be treated as remitted to the UK in the following circumstances:
- The company ceases to be an eligible company;
- The person who made the investment ceases to be a relevant person, or disposes of all or part of the holding;
- Value is extracted where:
- The investor, or a relevant person receives value in money, or money’s worth; and
- The value is received other than by virtue of a disposal that is attributable to the investment.
Value is not treated as extracted from the company where the value received by the relevant person is treated as the receipt of income for income tax, or corporation tax purposes, or would be so treated if that person was liable to such tax and is paid or provided to the person in the ordinary course of business and on arm’s length terms. Accordingly, salaries and dividends paid on an arm’s length basis by the company, or a relevant person, are not caught by this restriction.
The rules surrounding extraction of value have been greatly simplified as they now only apply if value is extracted from the investee company or is attributable to that investment. This is a much narrower rule than applied before April 2017, and the rules were changed to make the scheme more attractive to investors.
From 6 April 2017 the rules were also amended to allow the purchase of shares from a third party to qualify for business investment relief.
The investor must take the overseas income or capital gains which were remitted for the purposes of the investment out of the UK when the investment is disposed of. This must be done within 45 days of the date the individual receives the money generated by the disposal. Alternatively the individual may reinvest the original overseas income and gains into another qualifying business within the 45-day period without the necessity of expatriating the funds first.
Any gain arising out of the investment may be retained in the UK but will be subject to UK taxation in respect of that gain arising on the disposal. Similarly, any income (dividends) arising from the investment whilst it is held are most likely to be UK source income and therefore taxable on the investor as the income arises.
The claim to relief in respect of the remittances for qualifying businesses will form part of the investor’s UK self-assessment tax return, and the claim must be made by 31 January following the end of the tax year in which the foreign income or gains would be treated as a remittance, and the investor will be required to show:
- Whether the remittance was income, or capital gains;
- How much had been remitted for this purpose, and
- In what business the investor has invested.
BIR can be used very tax efficiently to make qualifying investments through either the Seed Enterprise Investment Scheme (“SEIS”) or the Enterprise Investment Scheme (“EIS”). Combining these reliefs provides the investor with the opportunity to remit overseas income to the UK tax-free, and obtain income tax relief of either 50% (SEIS) or 30% (EIS) on the qualifying investment. Further CGT relief may also be obtainable, depending on the investor’s circumstances. (See sections on SEIS and EIS.)