Business Investment Relief & SEIS / EIS relief for Non Doms
"The advantages available to non-UK domiciles (“non-doms”) individuals who are taxed on the remittance basis to bring fund to the UK under the Business Investment Relief (“BIR”) provisions to invest in EIS or SEIS qualified companies."
You are clearly very familiar with the EIS and SEIS provisions but may not be so familiar with BIR. By way of background, many non-doms are faced with the issue of having insufficient clean capital to remit to the UK tax-free, in that their offshore assets comprise income, capital gains or a combination of both (“mixed funds”). Where these funds are remitted to the UK there will be a tax charge on the remittance as determined by the UK legislation. It would not surprise you that these work very much in HMRC’s favour in that in what is deemed to be remitted first are the sources that give rise to the highest UK tax liabilities. For many clients this can be a major issue.
To encourage those non-dom individuals to invest in the UK the coalition government introduced BIR; the conditions for which are simplistically:-
It applies only to individuals who are considered to be UK resident but non-dom and taxed on the remittance basis.
It allows them to bring overseas incomes and gains into the UK tax free and without limit.
Monies brought into the UK must be used to invest in qualifying business investments. These are broader than just companies that qualify for EIS or SEIS. Quoted companies are excluded, but virtually any other company (but not non-corporate entities such as partnerships and sole proprietorships) carrying out a trading business may qualify. Interestingly, investment into property development or property rental companies are allowable.
It can be invested in a company in which the investor is, or associates are, involved in.
Must be invested in the form of shares or loans and no related benefit can be received (such as property, goods or services, money or capital). The investor can extract value from the investment as long as it is on an arm’s length basis and is in the ordinary course of business - such as a salary. The no benefit rules also apply to members of the individuals' family.
When the investment is sold, if there is a gain it will be subject to UK Capital Gains Tax - but the original funds can be taken back offshore again (within a 45 day or 90 day time period) in order to avoid being taxed.
Funds must be invested within 45 days of the money being brought into the UK for the purposes of the investment.
Business Investment Relief must be claimed by the following 31st January following the tax year of remittance; usually within their UK tax return.
I thought that you may be interested in some practical examples of how the combination of EIS and BIR can work together to benefit non-dom clients.
Tax efficient remittance
Non-dom investor is UK resident. He has been UK resident for five years and so does not need to pay a remittance basis charge.
He has £10 million of unremitted foreign income. He has no UK income.
The investor brings £1 million of his unremitted income into the UK which he immediately uses to subscribe for shares in a company which qualifies for EIS relief and BIR. As he does not have any UK income, he does not stand to benefit from the EIS income tax relief.Accordingly, in the same tax year as he makes his investment, he remits to the UK an additional £700,000 of income, on which approximately £300,000 of income tax would be payable.
Initial tax consequences:
even though he has brought income into the UK, the non-dom investor is not treated as having remitted the £1 million
The investor can remit £700,000 of his foreign income to the UK effectively tax free due to the EIS relief credit (30% of the amount invested)
Five years later, he sells his investment for £2 million.
of the £2 million proceeds, the investor must return £1 million offshore within 45 days in order to avoid a charge to income tax, or, alternatively, the funds can be reinvested into EIS
The non-dom investor can keep the £1 million gain element in the UK and it is exempt from capital gains tax as a qualifying EIS investment.
Non-dom investor loses the lot.
What if EIS investment turns out to be a total fails and the shares are valueless?
On the negative side, he has of course lost his initial outlay of £1 million. But, against that, he has managed to remit £700,000 of usable funds into the UK at no tax charge. If he had to pay income tax on the remittance he would need to bring £1.25 million into the UK in order to have £700,000 after tax. So looked at one way, £550,000 of the loss is theoretical.
Furthermore, his capital loss of £1million, less the £300,000 income tax relief which the non-dom investor received at the outset, is allowable to reduce his taxable income for the year. In other words, non-dom investor can remit another £700,000 of his unremitted income without any liability to tax.
Assuming that non-dom investor needs to remit substantial sums to the UK, the investment would appear to be virtually risk free.
Looking at the cash position at the end of the day, the position may be summarised as follows:
If non-dom investor doubles his money, he has:
£9,300,000 of unremitted income offshore (£10 million less the £700,000 he remitted tax free); and
£1,700,000 onshore, which he can use to fund his UK living for a number of years (a total of £11 million)
If the investment fails completely, he has:
£7,600,000 of unremitted income offshore (£10 million less his investment of £1 million, together and also the £700,000 he remitted tax free plus the further £700,000 he remitted when the investment failed); and
£1,400,000 onshore, which he can use to fund his UK living for a number of years (a total of £9 million)
Contrast this with the position if non-dom investor needed £1,400,000 in the UK and did not make an EIS/BIR investment. In order to have £1.5 million in the UK after tax, he would need to remit approximately £2.5 million of income. The cash position would then be as follows:
Non-dom investor would have only £7,500,000 of unremitted income offshore; and
£1,500,000 onshore. (a total of £9 million).
So, in this example, by making the investment and losing his money, non-dom investor is no worse off than if he had simply remitted the income and paid tax on it.
Although losing his entire investment may not be the disaster which it might at first have seemed to be, clearly the risk can be spread by either by investing in a fund of varied investments or a number of EIS companies.
Wilson Wright LLP