Business Investment Relief
Business investment relief (‘BIR’) allows non-UK monies to be brought to the UK without being subject to UK taxes, providing these are used to invest in a “qualifying business” and a number of conditions are met. Previously, individuals who were UK resident but non-UK domiciled and claimed the remittance basis would be subject to UK taxes on non-UK income and gains remitted to the UK. Business Investment Relief offers such individuals a valuable way of utilising those funds in the UK that would otherwise need to remain offshore.
Business Investment Relief provides a favourable avenue for utilising foreign income and gains which would otherwise be taxed on remittance to the UK.
In 2016, the Government consulted on potential changes to the BIR regime to increase its attractiveness and as part of a wider reform of the taxation of non-domiciled individuals. Only a small number of changes were introduced in April 2017 as a result of that consultation, although there was initial hope from the industry for more widespread changes to encourage further UK investment and use of the business investment relief.
Current BIR Rules
- Where funds are brought to the UK, providing they are used to make a “qualifying business investment” within 45 days, there is no Income Tax nor Capital Gains Tax payable on the remittance of the funds
- A “qualifying business investment” includes a subscription for, or acquisition of, ordinary or preference shares in, or a loan to, a company that meets a number of conditions. To be “qualifying”, a company must be:
- Unquoted (companies listed on the Alternative Investment Market (‘AIM’) are deemed unquoted for these purposes)
- A trading, stakeholder, hybrid or holding company. This will almost always include companies that qualify for Enterprise or Seed Enterprise Investment Relief
- ‘Unconnected’, either directly or indirectly, with the investor
- There is currently no limit on the amount of relief available under BIR
For the purposes of business investment relief, HMRC’s definition of “trade” includes activities treated as trade for Corporation Tax purposes, as well as a business which generates income from land or property and activities involving research and development which are intended to lead to a commercial trade. There are, however, a number of grey areas in the legislation and it is therefore vital that UK tax advice is sought.
A ‘stakeholder company’ exists to invest in qualifying trading companies and a ‘holding company’ is one that holds more than 51% of the shares in an eligible trading company/companies.
From 6 April 2017, the definition of a “qualifying investment” also includes a hybrid company. HMRC defines a hybrid company as a private limited company which:
Is not an eligible trading or stakeholder company
Carries on one or more commercial trades or intends do so within the next 5 years
Holds one or more investments in eligible trading companies or intends to do so within the next 5 years
Makes investments in eligible trading companies as all, or substantially all, of what it does
Carries on trade with a view to making a profit.
Broadly speaking, HMRC will regard a company to be carrying on a commercial trade if the relevant trade accounts for at least 80% of the company’s total activities
The investor is ‘connected’ to the company if they (or any ‘relevant person’) are entitled to a benefit from the company or expect to receive one (unless this is in the normal course of business such as a salary or dividend). A relevant person includes a spouse/civil partner, children or grandchildren under the age of 18, trustees of a settlement of which a relevant person is beneficiary, and a participator in a close company.
Where benefits are received in relation to the investment other than in the course of business, the relief will be clawed back and associated tax will fall due.
How to claim Business Investment Relief
Business Investment Relief must be claimed by the investor on their personal tax return by the first anniversary of the 31 January following the end of the tax year in which the foreign income or gains are brought to the UK for investment. For example, for a remittance to the UK in the year ending 5 April 2023, the deadline for making a Business Investment Relief claim is 31 January 2025.
Qualifying Business Investment Relief Claim
An individual intending to make a business investment can ask HMRC for advance assurance as to whether the investment will qualify for BIR.
In addition to Business Investment Relief, the investment could attract other tax reliefs depending on the nature of the investment.
Some examples include:
- Enterprise Investment Scheme (EIS) – Income Tax relief at 30% on up to £1m investment and CGT exemption/relief
- Seed EIS – Income Tax relief at 50% on up to £100,000 investment and CGT exemption/relief
- Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief, until 6 April 2020) – 10% rate of CGT on up to £1m of lifetime gains
- Business Property Relief – Inheritance Tax Exemption
Disqualifying Events
Business Investment Relief will be withdrawn and the relevant remittance will become chargeable to UK taxes if a Potentially Chargeable Event (“PCE”) occurs. PCEs are breaches of the conditions for BIR to apply, as outlined above. They include the target company ceasing to be eligible for BIR, the investor disposing of the investment or receiving an ineligible benefit as described above.
If a PCE occurs, then the entirety of the BIR is withdrawn unless the funds are reinvested or taken offshore.
Generally, where the PCE results in a cash receipt (e.g. disposal of shares or receipt of value or benefit from the company), the investor would have 45 days to either reinvest the proceeds or take them back offshore.
However, different time limits may apply depending on the nature of the PCE.
Where the PCE does not result in a cash receipt (e.g. if the company ceases to be a qualifying investment), then the investor generally has 90 days to sell the shares and a further 45 days to reinvest the proceeds of sale or take them back offshore.
The exception to the above is where the company breaches the 5 year start up rule. In this case, the investor has 2 years to dispose of the holding and to take the disposal proceeds (less any previously taxed remittance) offshore or reinvest them.
These time limits are only indicative and do not necessarily catch every type of PCE. The rules regarding when a PCE takes place, how the time limits are calculated and how much of the investment must be taken offshore are extremely complex. Advice should therefore always be sought before making an investment on which BIR is intended to be claimed, and the ongoing qualifications of the investment should be monitored regularly.
Don’t forget to read out overarching guide on Residence & Domicile.
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