YInvesting in EIS or SEIS qualified companies will get you tax relief under the Business Investment Relief (“BIR”) provisions.
Business Investment Relief is one of a number of tax strategies available to non-UK domiciled (“non-doms”) individuals. HMRC taxes non doms on the remittance basis when bringing funds into the UK.
When non-doms remit funds there will be a tax charge on the amount received into the UK. However, in order to combat that and also to encourage investment in the UK by non-dom individuals, the government introduced BIR. The rules are as follows:
- Only for individuals who are UK resident, non-dom and taxed on the remittance basis.
- You can bring unlimited overseas incomes and gains into the UK tax-free
- You must invest in qualifying business investments such as those that qualify for EIS or SEIS. Quoted companies are excluded, but virtually any other company carrying out a trading business may qualify. Interestingly, investment into property development or property rental companies is allowable. You can’t invest in non-corporate entities such as partnerships and sole proprietorships.
- The investor or associates are, can be involved in the company prior to the investment.
- 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.
- You must claim Business Investment Relief by the following 31st January following the tax year of remittance; usually within their UK tax return.
£1m remittance scenario
Non-dom investor is UK resident not paying a remittance basis charge since he has been resident here for less than seven years. With no UK income and £10m of unremitted foreign income.He subscribes for EIS shares by bringing £1m into the UK but he does not get income tax relief. So to account for this he sends £700,000 which will give rise to income tax of £300,000.
- £1m not treated as remitted
- The £700,000 is also tax free due to EIS tax credit of 30% of his investment
Say he then sells his investment for £2m.
- £1m return offshore within 45 days or reinvest into EIS
- The gain of £1m can stay in the UK (exempt from capital gains tax via EIS)
Although losing £1m he does have £700,000 in the UK which would have otherwise required a remittance of £1.25m into the UK. So in this worst case scenario, the net cashflow is £450,000 loss.
Also of his net capital loss of £700,000 (£1m after the £300,000 relief), this can be set off against his other income. So he can bring another £700,000 into the UK which would round down to Nil income.
|Money Doubled||Investment Lost||Non-EIS Remittance|
|Offshore funds||£9.3m (£10m – £700k)||£7.6m (£10m – £700k – £700k)||£7.5m (£10m – £2.5m)|
|Onshore funds||£1.7m (£1m gain + £700k)||£1.4m (£700k + £700k)||£1.5m (£1m paid in taxes)|