Tax mitigation is key in investor strategies, which is why the UK's Business Investment Relief (BIR) scheme is so attractive to foreign and non-domiciled investors. Essentially, the Business Investment Relief scheme allows an investor to send foreign income or capital gains to the UK through a qualifying investment for a tax break.
Rather than funnel money into government bonds, unnecessary insurance schemes, and illiquid investments like property, claiming a remittance basis can be more than tax relief, but another business opportunity. Investors who accumulate overseas income and are looking to make a UK investment should seriously consider whether or not the BIR scheme is right for their portfolio.
What is Business Investment Relief?
First introduced in 2012, business investors were slow to apply BIR until its 2017 reforms, which appealed to non-domiciliaries. The BIR provides an avenue for Remittance Based Users (RBU), or UK citizens or non-domiciliaries who are living outside the county, to reduce their UK income tax and capital gains tax. All the investor needs to do is invest in commercial business in the UK.
This scheme benefits the investor as a sort of entrepreneurs relief from UK taxes. At the same time, the United Kingdom's government is able to attract foreign investors to fund local businesses.
The reason BIR is so attractive after its reforms is due to how it affects non-domiciliaries. If a non-dom chooses to file taxes on a remittance basis during the tax year and are qualified as long-term residents, they must pay an additional tax charge. This tax charge is based on how long they have lived in the country. For example, a non-dom who has lived in the UK for seven out of the last nine years will be charged £30,000. Those living for 12 years or more in the UK pay £50,000. The Business Investment Relief scheme allows investors to reduce their taxable remittance.
What are the conditions?
An investor may claim as much as they want under this relief scheme, whether that is £10,000, £100,000, or more. However, there are several conditions that must be met:
- The claimed investment must be in a qualifying company, also called a target company.
- The investment does not have to be in pounds. Preference shares, ordinary shares, or loans are also applicable. The 2017 reforms allow for investors to also claim the acquisition of existing shares.
- Investors must make the investment within 45 days of the overseas income and capital gain income being brought to the UK.
- No benefit attributable to the investment can be received by the investor or any 'relevant person'. A relevant person can be defined as a husband, wife, or civil partner, children or grandchildren, trustees of a settlement where a relevant person is a beneficiary, and a participator in a company owned by a relevant person.
- The disposal proceeds must be taken offshore or reinvested in another qualifying company within 45 days. The mandatory reinvestment amount must equal the original investment amount.
Every investment must meet these initial conditions to qualify for the BIR. To claim the assets as a part of BIR, there are a few other items to consider.
For example, what happens if a business fails before an entrepreneur can invest? So long as the investor removes the funds within 45 days of remitting the overseas income to the UK, then they can avoid the taxable remittance. If the individual is late to invest and fails to put their money into a qualifying company within that time frame, they would have remitted their funds to the UK and may be taxed accordingly.
Therefore, it's critical that investors take the appropriate mitigation steps and follow the conditions in order to reduce their chargeable remittance.
What kind of businesses can you invest in?
The next concern for investors is the type of company they can invest in. A qualified company can be defined as follows:
- It must be a private limited company. Partnerships and unincorporated companies are not eligible.
- The company must carry on commercial trade, or be prepared to carry trade within five years of the investment or the company must hold at least one investment in an eligible target company preparing to carry trade.
In case the investor is uncertain over whether their potential investor qualifies, they can request HMRC Clearance.