A BIR’d in the Hand

Or how to remit and make free investments

The difference in the way the UK taxes its own citizens and non-UK domiciles (“non-doms”) is well understood.  Most of us have heard of the remittance basis of taxation and most people who live in the UK but were not born here or whose parents were not born here, will be well versed on the basis on which it operates.

In a nutshell, if you are a non-dom and have income or gains from assets arising overseas they will remain generally outside the scope of UK taxation provided you claim the remittance basis and they stay overseas.  You will only face the prospect of any tax if you remit that income or gains to the UK.  That could mean a straight 45% tax charge if what you bring in to the UK is income in your hands.  Which is why much thought and careful planning goes into ensuring that remittance by non-UK domiciles is avoided as far as possible and remittance of income is absolutely a last resort.

Investing in Businesses

Most UK citizens wishing to invest in a business based here must make that investment from taxed income and gains, unless they can invest via their pension perhaps.  Until April 2012, the same was also true for non-doms wishing to invest their overseas funds, as investing into a UK business, would generally require a remittance of those funds to the UK.  Tax would be suffered on the remittance and only the net proceeds would be available for investment.

However, the Government clearly wanted to demonstrate that Britain is “open for business” and attract some of that foreign investment into the UK economy.  Since April 2012, this disincentive has therefore been removed.  Provided certain conditions are met the funds remitted can be used for investment that meets fairly wide criteria.  In return, HM Revenue & Customs will not treat the investment as a remittance of taxable income.This Business Investment Relief (“BIR”) regime, therefore allows UK resident non-UK domiciled individuals to invest in their new favourite local football team, as long as it is not stock exchange listed, or their professional firms such as accountants, solicitors and research and development companies, together with property development and even property rental businesses.  And unlike the majority of tax incentives that apply to UK citizens that investment can be made by way of subscription for shares or even by way of loan, if preferred.  Funds can also be used to pay-off existing third-party loans that have been used for investment into such enterprises.

Enterprise Investment Scheme and Seed EIS

The Enterprise Investment Scheme (EIS) has been around for 30 years or more, although it has previously been called the Business Expansion Scheme.  Seed EIS is a more recent extension of EIS, which offers higher rates of relief for investments made into smaller companies with perceived higher risk.  Both schemes offer UK taxpayers an opportunity to claim immediate tax relief for the amount of an investment made by way of a subscription for shares in a qualifying company.

The rules are narrow and there are limits to the amounts that can be invested (see separate article) but assuming those rules apply, and generally they will apply if EIS or SEIS is “targeted” as a basis for attracting tax-relief for an investment, then these reliefs can significantly reduce the investment risk for an investor.

Furthermore, they can apply in addition to Business Investment Relief for non-doms.

Free Investment for Non-UK domiciles

This combination of reliefs could arguably enable a UK resident non-dom investor to make a virtually zero cost investment using funds which would otherwise have to remain offshore, thereby providing a significant advantage for non-UK domiciles compared with UK citizens.

Consider the following.  Firstly, a UK citizen wishing to invest in his own accountancy firm or estate agency.  His “other” unearned income of £200,000, will have been eroded by up to 45% income tax, leaving him only £110,000 net and only £10,000 left after he has made his £100,000 investment into his new business venture.  Following the introduction of BIR, a non-dom  on the other hand would not suffer UK tax on the remittance of his “other” unearned income arising offshore and furthermore, he may not have suffered tax in that other jurisdiction either.  He would clearly be better-off than his UK counterpart to the full extent of the £90,000 income tax that other person has suffered.

Now consider the same example where both parties also have UK source earned income of a similar amount, and the new business venture qualifies for SEIS as well.  This time £180,000 of tax is deducted from the £400,000 total income of our UK citizen, although he will be entitled to claim 50% tax relief for his SEIS investment, leaving him with £170,000 net cash in hand after making the investment and claiming the associated tax relief.

Our non-UK domicile on the other hand will suffer tax on only his UK source income and will also be entitled to claim SEIS relief at 50%.  He would be left with £260,000 net of his original £400,000, albeit £100,000 must remain offshore, as he can only remit the amount that he invests in the SEIS company, if he wants to claim the remittance basis in respect of his other income.

The combination of BIR and SEIS reliefs available to a non-dom, essentially provide 95% tax relief for the right type of investment, when compared to remittance without investment.

Conclusion

The above is not an over-simplification, although the numbers have been rounded slightly.  The Government’s intention when introducing the Business Investment Relief regime, was to attract foreign investment by allowing foreign income and gains to be treated as not remitted to the UK.  The scope and application of BIR is very wide, whilst the rules are light touch but it is still possible to trip over them, so advice should be sought.  However, the main thrust is that any non-UK domicile who has overseas funds and is considering making an investment of any nature, should ask whether it might be possible to take advantage of the BIR regime and utilise those overseas assets, which might otherwise be regarded as locked.

And if the investment being considered is in an EIS or SEIS company, you might just be able to make that investment for free, or very close.