David Kilshaw and Nicki Staff explain why family offices can breathe a sigh of Business Investment Relief.
A key question for family offices in London can often be: how do we get monies to the UK tax efficiently to fund investments, lifestyles, luxury assets, etc. The answer is often overlooked: business investment relief (BIR). It is tempting to think of BIR as being of narrow application. This is not the case. With care, and subject to a clear commercial purpose, this relief can be available for investing in businesses generating income from residential property and luxury assets such as yachts and private jets. The amount of relief available applies to an unlimited amount of remittances. Where the principal of the family office is non-UK domiciled, BIR repays detailed scrutiny.
What is its purpose?
The new relief is a welcome and long-awaited improvement to the remittance rules which were overhauled in FA 2008. Previously the rules actively discouraged inward investment as they were introduced without the inclusion of any provisions to encourage UK resident foreign individuals to invest in UK businesses.
What investments qualify?
The relief broadly applies to investments in unquoted private trading companies, either in the form of a subscription for new shares or debt. Unlike other reliefs, for example Enterprise Investment Schemes (EIS), there are no restrictions on the type of trade, other than it must be carried out on on a commercial basis. This is a generous relief and means that an investment into a business generating income from luxury assets (yachts/private jets) or land, including residential property, can qualify for the relief.
Furthermore there are no exclusions to the relief for individuals ‘connected’ with the investee company. Therefore the investment can be into a wholly-owned company of the investor, or the investor’s employer company. This provides significant opportunities for non-doms wishing to bring funds to the UK.
An investment by the individual’s spouse, a trust of which they are a settlor or a non-UK resident company of which they are a shareholder, can all qualify for the relief since the remittance of the funds can be by an individual or a ‘relevant person’. There is also no requirement for the investee company to be UK incorporated. The conditions allow wide application of the relief and may provide the key to unlocking offshore funds for many family offices.
The legislation includes an anti-avoidance provision to exclude the relief if there is a tax avoidance motive and care must be taken to ensure any investment has a commercial purpose. Furthermore, no ‘benefit’ can be derived from the investment by the individual or any relevant person since this will preclude the availability of the relief, so any personal use of any business assets by the investor must be provided on commercial terms.
Despite these restrictions, a non-dom may be able to avail himself of this relief in circumstances where they can enjoy the remitted funds. Thus with care, a family office with a desire to acquire any asset in the UK may be able to structure such an investment to qualify for the relief, providing a commercial motive for the investment is demonstrable.
There is a statutory clearance procedure which can be used to provide advance assurance that an investment will qualify for the relief. While not mandatory, we would advise clearance be obtained in all circumstances, particularly where there is any doubt over a transaction. In practice we have found HMRC to be cooperative and sensible in its approach to clearance applications, as well as providing prompt responses. This too enhances the attraction of BIR as a positive solution.
A business investment may also qualify for any other relief if the conditions for that relief are met, and this provides significant scope to make tax efficient commercial investments in the UK using otherwise taxable income or gains. Investment reliefs which may be available in addition to BIR include:
EIS – income tax relief at 30% up to £1m investment in shares, CGT exempt if shares held for three years.
SEIS – income tax relief at 50% up to £100k investment in shares, CGT exempt if shares held for three years.
Beware the traps and pitfalls
There are of course a number of legislative clauses to navigate to ensure BIR is obtained and continues to be available throughout the life of the investment.
Firstly the remitted funds must be invested within 45 days or they must be returned offshore to avoid a taxable remittance. Further, without careful monitoring the non-dom may find that an investment previously qualifying for relief no longer qualifies because a ‘chargeable event’ has occurred. If mitigation steps are not taken in these cases within a specified period, a tax charge will arise on the remittance.
Care must also be taken to ensure the funds are remitted to the UK by either the individual or a relevant person. If the funds are remitted by any other person the relief will be denied. Attention must therefore be given to which party brings the funds to the UK.
In conclusion, most running family offices will find that BIR offers real solutions to real problems.