BUSINESS INVESTMENT RELIEF

(1)    What is it?

Business Investment relief (“BIR”) is a relief from capital gains tax (“CGT”) or income tax (“IT”) available to remittance users, for what would otherwise be a remittance to the UK of foreign income or gains (“FIG”), chargeable under the remittance rules in the Income Tax Act 2007 (see Ch. A1, Part 14, ITA 2007[1]) for individuals who are not domiciled in the UK and not deemed to be domiciled in the UK (“non-doms”). 

Whilst we expect the existing non-domicile regime to be scrapped by Labour, there has not yet been talk of removing BIR, which should still be available to non-doms in relation to historic unremitted income and gains, including for the tax year 2024/25; and as an alternative to the proposed temporary repatriation facility for historic income and gains, which proposed charging remitted income and gains until 2026 at 12% (if enacted). It seems at the time of writing, that the Conservative's proposal for foreign income arising in 2024/25 to be charged at 50% of the IT rate will definitely not be made available by Labour. 

BIR has been relatively popular, with at least £1.5bn having been invested in the UK since it was introduced (in 2012).  There was a Consultation in 2016 with a view to making the relief more attractive, resulting in changes made by Finance Act 2017.

However, it has detailed prescriptive rules for the availability of relief on the initial investment, rules which apply on an ongoing basis to the investment, and rules which must be met in relation to extracting funds out of the investment.  I discuss some of the more controversial ones here.

The way in which BIR operates is that there is deemed to be no remittance if there is a “relevant event” and a claim for relief is made (by 31 January following the end of the tax year in which the relevant event occurs). A “relevant event” occurs if (a) money or other property is used by the taxpayer (or other “relevant person”) to make a “qualifying investment”, or (b) is brought to or received in the United Kingdom in order to be used by a relevant person to make a qualifying investment (investment must be made within 45 days of the relevant event, or taken back offshore to avoid there being a remittance).

There is a targeted anti-avoidance rule, so the relief cannot be claimed if the relevant event occurs, or the investment is made, as part of or as a result of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.  The ‘main purpose of the arrangements’ test here is very similar to that in section 137 TCGA 1992.  One has to establish first what the arrangements are, and then what the purposes of the arrangements are, and then whether one of those purposes is the avoidance of tax, and if so whether that is a main purpose: see Euromoney v HMRC [2021] UKFTT 61 at [71] (applying the approach taken in the case of Snell v HMRC [2007] STC 1279), approved by the Court of Appeal in HMRC v Delinian [2023] EWCA 1281.

“Arrangements” is not defined here and therefore takes its ordinary meaning, of a combination of things for a purpose.

To establish what the “purposes” of the arrangements are, one looks to the subjective purposes of the relevant actors involved in designing and/or implementing the arrangements, as opposed to looking only the purposes of a person in being a party to a particular transaction forming part of the arrangements The difference between the two types of purpose test is discussed by the Court of Appeal in BlackRock HoldCo 5, LLC v Commissioners for His Majesty's Revenue and Customs [2024] EWCA Civ 330, in respect of the interpretation of section 442 of the Corporation Tax Act 2009, which looks at the purpose of a person in being a party to a loan relationship: “…The purpose or purposes for which a company is a party to a loan relationship may or may not be the same as, for example, the purpose or purposes for which the company exists, or the purpose or purposes of a wider scheme or arrangements of which the loan relationship forms part. Those other purposes may, for example, encompass the purposes of other actors. There is a contrast here between the unallowable purpose rule and  …[a rule that]…  requires consideration of the main purpose or purposes of "arrangements".” at [107] per Falk LJ.

The expression “avoidance of tax” is not defined, and should in the author’s view be given the “Willoughby” meaning of reducing one’s tax liability without suffering the economic or other consequences intended by Parliament: see IRC v Willoughby [1997] 1 WLR 1071 at 1079B-G, 1081B-D.  In other words, remitting untaxed income or gains to the UK under arrangements to enable BIR to be claimed on the remittances, is within the intention of Parliament in enacting the BIR rules, but it would not be if, for example, arrangements are made to enable a person to use the remitted funds for personal gain instead of in a qualifying investment, whilst still meeting the detailed conditions explained below. 

(2)    What is a qualifying Investment?

A person makes an investment if shares in a company (which includes securities) are issued to or acquired by the person, or the person makes a loan (secured or unsecured) to a company (in each case “the Target Company”).  The investment is a ‘qualifying investment’ if two conditions, ‘A’ and ‘B’ are met when the investment is made. Condition A is that the target company is —

o             an eligible trading company,

o             an eligible stakeholder company,

o             an eligible hybrid company, or

o             an eligible holding company.

A company is an “eligible trading company” if it is a private limited company, it carries on one or more commercial trades or is preparing to do so within the next 5 years (that was extended from 2 years by Finance (No 2) Act 2017 for investments on or after 6 April 2017), and carrying on commercial trades is all or substantially all of what it does (or of what it is reasonably expected to do once it begins trading).

HMRC interpret “all or substantially all” as meaning 80%. (see HMRC’s manuals RDRM34345).

As mentioned below, the definition of a trade is more generous than the usual definition for other tax purposes.

A company is an “eligible stakeholder company” if it is a private limited company, it exists wholly for the purpose of making investments in eligible trading companies (ignoring any minor or incidental purposes), and it holds one or more such investments or is preparing to do so within the next 5 years.

A company is an “eligible hybrid company” if it is a private limited company, it is not an eligible trading company or an eligible stakeholder company, it carries on one or more commercial trades or is preparing to do so within the next 5 years, it holds one or more investments in eligible trading companies or is preparing to do so within the next 5 years, and carrying on commercial trades and making investments in eligible trading companies are all or substantially all of what it does (or of what it is reasonably expected to do once it begins operating).

A company is an “eligible holding company” if it is a member of an eligible trading group (group means, broadly, a parent and its 51% subsidiaries) or of an eligible group that is reasonably expected to become an eligible trading group within the next 5 years, an eligible trading company in the group is a 51% subsidiary of it, and if the ordinary share capital that it owns in the eligible trading company is owned indirectly, each intermediary in the series is also a member of the group.

A group is an “eligible trading group” if it is an eligible group (meaning that the parent company and its 51% subsidiaries must be private limited companies, it must be a body corporate not an LLP and not listed on recognised stock exchange, and carrying on commercial trades must be all or substantially all of what the group does (taking the activities of its members as a whole).

Most private equity structures in recent years have involved the use of limited liability partnerships, which are excluded from BIR.  In particular, a company which is a partner in a partnership is not to be regarded as carrying on a trade carried on by the partnership.

Meaning of commercial trade

The expression “trade” carries its ordinary meaning. In Ransom v Higgs Lord Reid said that the word “trade” is commonly used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services. In Marson v Morton the court set out a list of matters which have been regarded as “badges of trade” in reported cases, emphasising, however, that the list is not a comprehensive statement of all relevant matters, nor is any one of them decisive in all cases. The most they can do is to provide common sense guidance to the conclusion which is appropriate; and that in each case it is necessary to stand back and look at the whole picture: see Sir Nicolas Browne-Wilkinson V.- C. in Marson v Morton [1986] 1 WLR 1343 at 1348-1349, applied in Eclipse Film Partners (No. 35) LLP v HMRC [2015] EWCA Civ 95.

“Trade” also includes a venture in the nature of trade, and in that connection in IRC v Livingston said that whether or not a venture is “in the nature of trade” depends on whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture is made.

For BIR purposes “trade” also includes a business carried on for generating income from land (as defined in section 207 of CTA 2009), meaning that letting property is included, provided of course that it is a business, and not for example, the letting out of a property with insufficient activity for it to be a business.  In American Leaf Blending v DG of Inland Revenue (Malaysia) [1979] AC 676, the court said that virtually anything which a company does to deploy its asset to make profits for its shareholders is a business (per Diplock LJ at p5).  

A trade is a “commercial trade” if it is conducted on a commercial basis and with a view to the realisation of profits.

The carrying on of activities of research and development from which it is intended that a commercial trade will be derived, or will benefit, is treated as the carrying on of a commercial trade.  But preparing to carry on R&D activities is not treated as the carrying on of a commercial trade.

As mentioned above, Condition B must also be met at the time of the investment. 

Condition B is that no relevant person has (directly or indirectly) obtained or become entitled to obtain any related benefit, and no relevant person expects to obtain any such benefit.  The expression ‘benefit’ is defined here, to include the provision of anything (being anything in money or money's worth, including property, capital, goods or services of any kind) that would not be provided to the relevant person in the ordinary course of business, or would be provided but on less favourable terms, but does not include the provision of anything provided to the relevant person in the ordinary course of business and on arm's length terms.

A benefit is “related” if it is directly or indirectly attributable to the making of the investment (whether it is obtained before or after the investment is made), or it is reasonable to assume that the benefit would not be available in the absence of the investment.

The expression “provision” is defined for this purpose, to include any arrangement that allows a person to enjoy or benefit from the thing in question (whether temporarily or permanently).

(3)    “Potentially chargeable events” resulting in loss of relief on the amount invested

Satisfying those detailed conditions for a qualifying investment to be made, one has to be careful not to breach other anti-avoidance rules on an ongoing basis. 

If a “potentially chargeable event” occurs after the investment is made, and the appropriate mitigation steps are not taken within the grace period allowed for each step, then the affected income or gains are to be treated as having been remitted to the United Kingdom immediately after the end of the relevant grace period. That is, relief is lost on the whole amount invested, regardless of the amount or value to which the breach relates.

“Potentially chargeable event” is defined in section 809VH, as where (a) the target company ceases to qualify; (b) there is a disposal of all/part of the holding; (c) the ‘extraction of value rule’ is breached; or (d) the ‘five-year start up rule’ is breached.

The extraction of value rule is breached if (a) value (in money or money's worth) is received by or for the benefit of P or another ‘relevant person’, (b) the value is received from any person in circumstances that are directly or indirectly attributable to the investment, and (c) the value is received other than by virtue of a disposal that is itself a potentially chargeable event.

There is an exception.  That is, the extraction of value rule is not breached merely because a relevant person receives value that (a) is treated for income tax or corporation tax purposes as the receipt of income or would be so treated if that person were liable to such tax, and (b) is paid or provided to the person in the ordinary course of business and on arm's length terms.

The extraction of value rule has been the subject of a case in the FTT in 2024: Benoit d’Angelin v HMRC [2024] UKFTT 462 on the meaning of ‘value’ in relation to a director’s loan account from a company in relation to which BIR was claimed.  In that case, “value” was held by the FTT to mean the gross amount in money or money’s worth and not “net value” as the appellant contended.  The directors loan account was interest-free and repayable on demand.  For his contention that there was no ‘net value’, he relied on the provision of interest-free credit by an employer to an employee resulting in a tax charge under ITEPA 2003 s 175 on the benefit of the cheap loan, which is treated as carrying interest on loan equal to the cash equivalent (ITEPA 2003 s 184). 

The FTT accepted HMRC’s contention that the concept of receipt of value is not concerned with whether the recipient has given consideration for the receipt, or whether they are better off overall, because one would not say as a matter of the ordinary meaning of the word 'value', that the value of an asset received is nil because the recipient gives consideration of equivalent value. On the contrary, the consideration given in exchange is ignored.

The FTT also rejected the appellant’s contention that the director’s loan account was provided to him in the ordinary course of business and on arm's-length terms within the proper meaning and effect of the exception.

In the course of its decision, the FTT referred to the Explanatory Notes and the Treasury and HMRC's joint consultation document ("Reform of the taxation of non-domiciled individuals) dated June 2011, which reads (as part of its section on anti-avoidance):

"[2.52] [...] the Government proposes to introduce a provision to prevent the value of the investment leaking out to the individual either directly through payments or loans which are not arms-length or through transactions designed to pass value to the individual. For example, it would not be permitted for the company to use the funds invested to guarantee loans made to the individual; nor would it be possible to make payments to a third party which are linked to payments made to the individual. This would not prevent an individual or a connected person enjoying commercial levels of remuneration from the company in which they invest or receiving dividends or interest out of profits made by the business after the investment has occurred."  In the summary of responses to that consultation (December 2011) the Government said:

"[2.73] The Government reiterates that it is critical to ensure that the policy is not used for tax avoidance or to provide a personal benefit for the investor. The legislation will include two rules to prevent the value of an investment leaking from a company to an investor either directly or indirectly. These will apply if: the invested company provides a personal benefit to the investor or a relevant person on terms which are not arms-length or commercial. This rule will apply if any portion of the business, however small, provides such a benefit; or the investment is made as part of a scheme or arrangement where the purpose, or one of the main purposes, is the avoidance of tax.”

The Explanatory Notes to FA 2012 state the following at [249]-[250]:

“Under the existing rules, remittance basis taxpayers are liable to UK tax on any foreign income or capital gains which they remit to the UK, irrespective of the purpose for which those income and gains are used. This can discourage such individuals from making commercial investments in the UK. Part 2 of the Schedule seeks to remove this disincentive by allowing remittance basis taxpayers to bring their overseas income and gains to the UK without becoming liable to tax provided they are brought to the UK for the purpose of making a commercial investment in a qualifying company.  [250]   To prevent abuse, there are a number of conditions to prevent an investor from using the relief as a means of enjoying their overseas income and gains in the UK tax-free."

This case is a stark reminder of the strict operation of the extraction of value rule (see also HMRC's Manuals, Residence, Domicile and Remittance Basis Manual (RDRM) §33420, for examples provided by HMRC). 

However, it must also be remembered that the extraction of value rule does not prevent an individual or relevant person from receiving a commercial salary, other commercial remuneration, dividends, interest or other income in respect of their rights as a shareholder or lender, provided UK tax is paid on such payments. 

Further, prior to the enactment of Finance Act 2017, there was considerable uncertainty over how the extraction of value rule operated in relation to groups of companies and parallel groups owned by associates which trade with one another, the companies in which are usually “relevant persons” for this purpose.  The uncertainty was as to whether intra-group transactions would fall within the exception.  Following further Consultation the legislation was amended with effect in relation to investments made on or after 6th April 2017, inserting the requirement for the extraction of value to be directly or indirectly attributable to the investment (FTT decision pending on earlier rules). 

Finally, there is no lifetime or annual limit to the relief, and for genuine matters of uncertainty, there is an assurance procedure available.

(4)    Conclusion

For those wanting to remit untaxed historic income and gains for the tax years up to 2023/24 to the UK and who do not benefit from the business other than within the terms explained above, BIR is definitely worth considering.  As mentioned above, the types of business activities which qualify for relief are wider than might be expected. For example, remitted funds could be used to invest in a property lettings company in the UK… provided of course that great care is taken not to breach the extraction of value rule!

[1] Which also applies for CGT purposes.