There seems to have been a consistent message to long-term UK residents who are also non- UK domiciled (non-doms), that if they want to stay in the UK they need to be paying more tax, with the implication that they are not paying enough. Many headlines suggested that this approach would result in a mass exodus of wealthy non-doms, but the reality is that the UK is still somewhere desirable to live with a vibrant cultural heritage within a relatively tolerant free-speaking society and, with appropriate advice, there is still planning that can benefit those with offshore wealth.
Under recently introduced rules, once someone has lived in the UK for 15 out of the previous 20 years, they are deemed domiciled in the UK for income tax and capital gains tax as well as inheritance tax purposes. This means in practice that their worldwide income and gains will be subject to UK taxation on an arising basis even if, in previous years, they paid the remittance basis charge and were only exposed to UK tax on their UK source income and anything remitted to the UK. Anyone who was born in the UK, left for another jurisdiction, adopted a domicile of choice in that other jurisdiction but then returned to the UK and became tax resident would immediately be regarded as UK-domiciled from the date they returned. Their original domicile of origin would revive.
Now that long-term UK residents are subject to UK taxation on the same basis as an individual born in the UK, it would be easy to think that there are no longer any planning opportunities for those with a domicile of origin outside the UK. Nothing could be further from reality, but getting the timing right is crucial. This article will focus on business investment relief (BIR).
Non-doms will be familiar with the requirement to separate out offshore income, clean capital and gains. Separating out offshore funds and then keeping them separate is important to ensure that, when transferred to the UK, the origins of those funds is clear. This can help to avoid generating an unnecessary UK tax charge.
A simple transaction such as a clean capital account that generates interest, and that interest is received in the same account, will be seen as creating “mixed” funds going forward. It is important to ensure that interest is automatically paid into another account rather than tainting the capital held. Where mixed or tainted funds are transferred to the UK, they will be taxed on the most unfavourable basis by HMRC (income is deemed to be transferred in priority to capital). For wealthy non-doms, there is often a mixed pot of funds held offshore and using those funds in the UK is usually to be avoided. Entrepreneurs who are aware of the availability of a claim under business investment relief (BIR) can however use those mixed funds in the UK without generating a tax charge if they meet certain criteria.
Initially introduced in April 2012, the BIR rules were relaxed in April 2017, making it even more generous. It enables UK-resident but non-domiciled individuals to bring offshore funds into the UK without triggering a UK tax charge, with the intention of encouraging more offshore investment in the UK. Claiming relief is relatively simple as it is made through the annual self-assessment tax return for the tax year in which the qualifying investment is made, and HMRC can offer an advance assurance mechanism to ensure that the proposed investment will qualify for BIR.
There is no limit on what can be remitted to the UK, but there are a number of conditions that must be satisfied for a successful claim to be made.
A qualifying investment for this purpose is where:
• shares in a company are issued to or acquired by the person making the claim; or
• the person makes a loan (secured or unsecured) to a company, and conditions A and B below are satisfied.
Condition A is that the target company must be:
• a private limited company (i.e. unquoted);
• carrying on one or more commercial trades or preparing to do so within the next five years; and
• carrying on commercial trade, which is all or substantially all of what it does. Relief is also available for companies that hold investments in companies that meet the conditions.
For BIR purposes, any activity that is a trade for corporation tax purposes will be considered a commercial trade, including farming or market gardening and the commercial occupation of land (but not woodland). The definition of trading is very broad in this context and includes the renting or leasing of land or property, including residential property, that ordinarily would be taxed as investment rather than trading activities. The usual HMRC approach on commerciality would still apply in that it should be trading with a view to profit.
Condition B is more restrictive in that no benefit should be received or enjoyed by the investor or any ‘relevant person’ in relation to the investment made. A relevant person includes a spouse/civil partner, children or grandchildren under 18, trustees of a settlement where a relevant beneficiary, and a participator in a close company.
For this purpose, a benefit can include anything such as money in any form, or the use or
occupation of a property for a rent less than the market rate. However, a benefit does not include any value subject to income or corporation tax, provided in the ordinary course of business on arm’s length terms, such as dividends paid out of profits or a market rate loan interest.
The investment must be made within 45 days of the non-UK income/gains being brought to the
UK to avoid being taxed as a chargeable remittance.
Not only do the qualifying conditions have to be met at the time of the investment, BIR may be withdrawn if a potentially chargeable event occurs at any point during ownership where appropriate mitigation steps are not taken within the specified grace period.
These events may occur when:
• some or all of the investment is sold, or a loan is repaid in part or in full;
• the target company ceases to trade; or
• the target company was preparing to trade but is still non-operational five years after the date of investment; or
• a relevant person receives value (in money or money’s worth) from the target company directly attributable to the investment.
Mitigation steps will require the disposal proceeds (up to the amount invested) to be removed from the UK, or reinvested in a new qualifying investment, within 45 days of the event.
Where the company ceases to trade or value has been received, the BIR claimant must dispose of the entire holding within 90 days of the event, and the proceeds must then be removed from the UK, or re-invested in another qualifying company within 45 days of the disposal.
In the case of a breach of the five-year start-up rule, the investor must dispose of the holding within two years of the date that the investor becomes aware, or ought reasonably to have been aware, of the potentially chargeable event. The disposal proceeds must be removed from the UK or reinvested in a qualifying investment within 45 days to successfully carry out the mitigation steps.
In conclusion, entrepreneurial non-doms who are not deemed domiciled in the UK should be considering the use of mixed offshore funds to facilitate UK investment where the conditions can be met. Care is needed to time the introduction of funds into the UK, and once the investment is made, careful monitoring is essential to ensure that a chargeable event has not occurred that will require action to be taken within the limited timeframe. If you can live with these restrictions, non-doms have a wonderful opportunity to use funds that could not otherwise be brought into the UK without adverse tax consequences.
This article is written by Lynne Rowland who is a tax partner at Kingston Smith who are members of the Beacon Gainer Group.