On 17 June 2011 a consultation paper was published on the government’s proposed removal of the tax charge on UK resident non-domiciled individuals who remit funds into the UK in order to invest in UK trading companies.
The change stems from a somewhat belated recognition of the significant contribution resident nondomiciles make to the UK economy and seeks “to encourage non-domiciled individuals to invest and do business in the UK”. Such a step towards making the UK more attractive to foreign investors and “fostering economic recovery” is extremely well received at this time, particularly because it is accompanied by the less welcome confirmation that the remittance basis charge will rise from £30,000 to £50,000 per year for non-domiciled individuals who have been resident in the UK for at least 12 out of the past 14 years.
Which investments will qualify for relief?
Since 2008 individuals resident but not domiciled in the UK have been able to claim the remittance basis of taxation (for the charge of £30,000 per year in the case of those resident for more than 7 out of the past 9 years) so that they pay UK tax only when their foreign income and gains are brought into the UK. The government’s new proposal is to permit the tax-free remittance of income and gains into the UK by resident non-domiciles claiming the remittance basis so long as the remittance is for investment in “qualifying businesses”. Benefit from the business investment incentive will only be available to individuals who claim the remittance basis. Individuals who choose to be taxed on all their worldwide income and capital gains instead of paying the remittance basis charge will not benefit.
The businesses which are to qualify must be carrying on “substantial” trading activities, unless those activities are focussed on letting residential property. It remains to be seen what “substantial” will mean in this case – will the business need only to be 50% trading in order to qualify (which is the standard currently employed in the test for business property relief from inheritance tax) or will a higher proportion of the business need to be actively trading in order to satisfy this test?
What is clear in the consultation paper is that only businesses established as companies will qualify – notably businesses run as partnerships or by sole traders will not qualify. This restriction is justified in the consultation paper on the basis that it will prevent tax avoidance; however its expansion will perhaps require further thought. The trading companies which will qualify include unlisted companies however and those listed on listed on AIM and the main market may not qualify.
Trading companies primarily holding and letting residential properties (except from residential property such as nursing homes and hospitals, where a commercial trade is carried on) are specifically excluded from qualifying. However, this exclusion is necessarily narrow as it will be possible to invest in qualifying companies which are developing and letting commercial property, or indeed invest in a business that builds and develops residential property.
Apart from the above restrictions, offshore income and gains can be remitted tax free to the UK to invest in any trading companies, including financial services, manufacturing, retail, technology and importing goods.
It is not proposed to impose any restrictions on the investor’s connections to the business in which they invest. Companies which are owned by the resident non-domiciles, in which they are shareholders and with which they are connected or otherwise associated, will qualify and this includes companies by which the resident non-domiciles are employed.
How will the relief work?
If the investment is made directly into the UK, the investor will be taxed in the normal way on any gain made when it is eventually sold.
However, the original remittance of the monies for the original investment will not be taxable provided the proceeds are either a) transferred out of the UK within two weeks after realisation, or b) reinvested in another qualifying business in the UK within two weeks after realisation. If the money remains uninvested in the UK for longer than two weeks after receipt, it will be treated as a taxable remittance of the original income or capital gains brought into the UK for the investment and will be subject to the usual remittance basis rules.
In practice, this two week deadline could prove difficult to meet in the case of re-investment in the UK, however there is nothing to stop the UK resident non-domicile transferring his funds offshore as soon as they are realised and waiting until a new investment is found before bringing the funds in again.
The consultation does not mention a restriction on the number of days the funds can be in the UK before the original investment is made, but the time limit is likely to be far more restrictive.
Alternatives to investment directly into the UK
As stated above, if the investment is made directly into the UK, the investor will be taxed to capital gains tax and income tax in the normal way on any gain or income arising in the UK. The consultation also makes no mention of treating the funds invested as excluded property and so they may also be charged to inheritance tax should the investor die while the funds are held in the UK. Therefore, it is key that the government does not propose to restrict investment by non-domiciles using funds held in offshore companies and trusts.
UK gains made within an offshore trust currently benefit from an indefinite postponement of tax until a benefit is received from the trust. Therefore, if UK resident non-domiciles invest in offshore vehicles, which in turn invest in qualifying UK businesses, it should be possible to realise gains without an immediate charge to tax in the UK. Moreover, if investment is made through an offshore company owned by the offshore trust the value of the investment will also benefit from excluded property status from an inheritance tax point of view and so should not be within the charge to tax on the investor’s death.
The consultation process closes on 9 September 2011.
Please note that the information in this note is necessarily brief and is not intended to be an exhaustive statement of the law or relied upon as legal advice. It is essential that professional advice is sought before any decision is taken.
© Stevens & Bolton LLP 2012