How non doms can use the new business remittance exemption to invest in UK property
The UK government is looking into ways of encouraging investment into the UK by making it a more attractive place to do business. New business investment relief has been introduced from 6 April 2012 to encourage investment by investors not domiciled in the UK, allowing them to remit their foreign income and gains to the UK, tax-free, in order to fund enterprises.
Non-doms will be able to make unlimited investments in trading and commercial property companies via shares or loans. This should make the UK a favourable place for non-doms to start or to continue to build their business interests. Investments can be made by an individual or through investment vehicles, including offshore companies and trusts. It can be in the form of money or any other property.
Investment in UK Companies
Investments must be made for the purpose of making a commercial business investment in an unlisted company or a company listed on an exchange-regulated market. This means that companies quoted on AIM and PLUS can be eligible, as well as foreign companies (provided they are private limited companies and the conditions set out below on qualifying activities are met). Investments in fully listed companies and partnerships, including limited liability partnerships, are not eligible for the relief.
The investments that qualify for the relief are investments into "eligible trading companies" or into "eligible stakeholder companies". An eligible trading company is a private limited company which carries one or more commercial trades (or is preparing to do so within two years), and carrying on commercial trades constitutes all or substantially all of its business activities (i.e. over 80 per cent of its total activities, which is usually measured by the company's turnover). An eligible stakeholder company is a private limited company which exists wholly for the purpose of making investments in eligible trading companies. As holding companies, they are eligible if they hold one or more investments in eligible trading companies or are preparing to do so within two years of a qualifying investment being made. Where a company has not commenced trading at the time of the investment, such trading should reasonably be expected to constitute all or substantially all of its total activities once it does commence trading.
Investment in Shares or Loans
Investments for the purposes of this relief can be made in shares in a company (which includes any securities), but these shares must be issued, which means that shares purchased from existing shareholders cannot be qualifying investments. However, as there is no requirement that these shares must be ordinary shares, investors may invest in shares giving preferential rights (for example, to dividends or to capital). Unsecured or secured loans to a company may also qualify for the relief. Where a loan can be drawn down in stages, the loan is treated as made when the first draw down occurs.
Investment in UK Property
Investment activity can include property. However, investment in UK property must be made through a company. The company's eligible activity may be developing or letting commercial property. Investment in a company which combines trading activities with developing or letting commercial property will also be eligible for the relief.
In relation to residential property, any business involved in residential property will be eligible for the business investment relief if its trade is building or developing residential property, or its trade involves the use of residential property (e.g. private student halls of residence, nursing homes, private hospitals). A company that holds or lets residential property may be eligible only if these activities constitute up to 20 per cent of its total activities, which is usually measured by the company's turnover. Companies undertaking furnished holiday lettings will not be qualifying businesses for the purpose of the relief.
Key points
There is no requirement for the target company to apply the invested funds for any particular purpose or within any particular timeframe. The company is not prevented from paying a salary to investors as employees, or a dividend/interest in respect of rights as a shareholder or a lender, provided that UK tax is paid on such payments.
To enjoy the full benefit of the relief, investors must reinvest proceeds from the disposal of all or part of a qualifying investment into another qualifying investment or they have to take the proceeds offshore within 45 days of the disposal.
It is interesting to note that a company in which the investment is being made does not have to be trading at the time of investment or have to start trading immediately. However, the company should commence qualifying activities within two years of the investment being made, or should make the investment in eligible trading companies within the same two-year period. This means that the company may be used as a "cash box" by investors for two years.
There is no annual or lifetime cap on the amount of an individual's non-UK income and gains that may qualify for the relief. Also, there is no restriction on the size of investor's shareholding in the company.
This relief is a great incentive for non-dom investors with substantial non-UK income interested in investing in UK property. UK property developers will also become more attractive to foreign investors.
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About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.