Under the current remittance basis rules, individuals are liable to tax on
the foreign income or capital gains which they remit to the UK,
irrespective of the purpose for which those income and gains are used.
From 6 April 2012 non doms will be able to remit their overseas income or capital gains to the UK tax-free, where they do so for the purposes of
making a 'qualifying investment'. A 'qualifying investment' is an investment in unlisted companies, or those listed on exchange regulated markets, which carry out trading activity on a commercial basis or undertake the development or letting of commercial property.
As you'd expect there are some detailed provisions to prevent someone benefiting for their UK investments.
Some of the key points that apply to this new relief
The legislation states that, in order to qualify for the
relief in cases where property is brought to or received in the UK that investment must be made within a period of 45 days from the day on which that property is brought to or received in the UK.
There is an anti-avoidance provision which disallows the relief where an investment is made, as part of or as a result of any scheme or arrangement whose main purpose, or one of the main purposes, is tax avoidance.
The non dom is required to make a claim for the relief within the time limits for the self assessment system. So a claim needs to be made no later than 31 January of the tax year following the tax year in which the income and gains would otherwise be taxed as a remittance.
A qualifying investment occurs where shares in a company are issued to a
person or where a person makes a loan to a company.
A qualifying investment needs to meet 2 conditions:
1. the company (generally) needs to be a trading company
This is defined as a private limited company which carries on one or more commercial trades or is preparing to do so within 2 years of the date on which the investment is made and that such trades constitute all or substantially all
of its total activities.
Where a company has not commenced trading at the time of the investments, such trades should reasonably be expected to constitute all or substantially all of its total activities once it does commence trading.
Property trading will therefore qualify but FHL investments won't.
Note that a stakeholder company can also qualify. This is defined as a
private limited company which exists wholly for the purpose of making
investments in eligible trading companies (disregarding any incidental
purposes) and which holds one or more such investments or is preparing
to do so within 2 years of a qualifying investment being made.
2. No relevant person must be able to benefit or expect to obtain such a benefit, whether directly or indirectly. Relevant person includes the standard definition (non dom, spouse, minor children/grandchildren etc)
A benefit is defined as including anything which would not be provided to the relevant person, or would be provided but on less favourable terms, in the normal course of business but excluding anything provided to the relevant person in the normal course of business and on arm's length terms.
The investment can be taxed as a remittance where:
• the company ceases to be an eligible trading company or an
eligible stakeholder company;
• the relevant person who made the qualifying investment ceases to be
a relevant person or disposes of all or part of their holding;
• the extraction of value rule is breached or
• the 2-year start-up rule is breached.
The extraction of value rule is breached where value is received by or for the benefit of any relevant person from an involved company or from anyone else in circumstances directly or indirectly attributable to any investment made by a relevant person in an involved company and where that value is not related to a
disposal of all or part of the holding.
The extraction of value rule is not breached where a person receives value in circumstances in which that value is subject to income tax or corporation tax, or would be so subject if the relevant person were liable to income tax or corporation tax, and provided on arm's length terms in the normal course of business.
So salary etc on an arms length basis paid from the company to the non dom/his family should be acceptable.
The 2-year start-up rule which applies where 2 years have passed since investment was made and the company has not commenced trading in that time.
