Non-domiciled residents who are liable for UK taxes can reduce the amount they pay on funds they bring into the country if they are investing in businesses that qualify for relief, writes Smith & Williamson's Richard Mannion.
Roberto and Nina, both in their early 60s, have been living in the UK for many years and are UK residents for tax purposes, but not domiciled here.
Roberto would now like to bring some money into the UK and to invest about £70,000 in his nephew Nico’s software company that is based in London.
Roberto would be using funds generated through a wide range of investments, made over a number of years in continental Europe.
He and his wife plan to stay in the UK for the next few years, so they wish to bring over further funds in the future. They will doubtless make trips abroad, but they clearly expect the UK to remain their home for the foreseeable future.
HM Revenue & Customs has confirmed that Nico’s business qualifies for the Enterprise Investment Scheme (EIS). Roberto is also a 50% tax payer in the UK.
What can he do to help the family organise this properly?
Under the tax rules, UK resident but non-UK domiciled persons can opt to be taxed on a remittance basis so that they are only taxed on income and gains arising in the UK plus income and gains arising offshore that are remitted to the UK.
The definition of remittance is complex but broadly relates to the transfer of untaxed funds into the UK.
The Finance Act 2012 introduced business investment relief for remitted foreign income and gains with effect from 6 April 2012. Through this relief, overseas income and gains can be remitted to the UK tax-free if used to fund certain qualifying business investments.
Therefore, non-domiciled individuals are now of particular interest to those who are able to offer such qualifying investments.
The main conditions of the relief are:
The investment must be in a qualifying company (the target company), which meets the eligibility conditions.
The investment must be in the form of shares or loans.
The investment must be made within 45 days of the foreign income or gains being brought to the UK.
No benefit attributable to the investment can be received by a relevant person.
On disposal of the investment, the proceeds of sale up to the amount of the investment must be taken offshore or reinvested in another qualifying investment within 45 days.
A company qualifies as a target if it is a private limited company that is carrying on at least one commercial trade. Trades include any activity treated as if it were a trade for corporation tax purposes, a business of generating income from land, and research and development activities that are intended to lead to a commercial trade.
Interaction with existing tax reliefs
Business investment relief can interact with other existing tax reliefs so long as the qualifying conditions for these are met. These can include reliefs on EISs, venture capital trusts and the new Seed EISs. With the introduction of business investment relief, non-domiciled individuals can now invest in an EIS company using offshore funds with no tax charged on the remittance.
A 30% income tax credit will be generated from the investment. This allows the non-domiciled person to remit further funds to the UK, generating a tax charge that can be offset by this credit. In Roberto’s case, the position would be:
Funds remitted £110,000
Investment in EIS qualifying company £70,000
EIS income tax relief £21,000
Remitted funds not exempt under
business investment relief £40,000
Tax charge (assume 50% tax rate) £20,000
Tax due after EIS income tax relief £0
Available funds to spend in the UK £40,000
Not only does business investment relief provide the opportunity for non-domiciled taxpayers to invest funds in the UK without a tax charge, but under the right circumstances it can also allow them to remit other funds to the UK.
Richard Mannion is national tax director at Smith & Williamson.