How ‘resident non-doms’ can bring money into the UK tax-efficiently, using Business Investment Relief

People who are UK-resident but not UK-domiciled (‘resident non-doms’) can face significant tax penalties if they move income or gains earned overseas into the UK. But Business Investment Relief can offer a helpful solution, particularly when combined with other tax reliefs.

Oxford Capital is not able to offer financial advice and this blog should not be construed as advice. Tax planning and EIS tax reliefs depend on individual circumstances and are subject to change. This is not a comprehensive description of BIR, and provides only a basic summary of the relevant rules. We encourage you to speak with a financial or tax adviser before investing so that your personal circumstances can be considered.

Business Investment Relief (BIR) exists to encourage wealthy resident non-doms to invest in the UK. It works by allowing offshore income and gains to be transferred into the UK without triggering a tax charge, as long as the funds are invested into qualifying investments within 45 days. There are various criteria to determine if an investment qualifies for BIR, but the basic rule is that the money brought onshore must be invested into a trading business, which should normally be a private limited company.

When the investor eventually sells their shares, the amount originally brought into the UK must be returned offshore or invested into another BIR-qualifying company in order to avoid a tax charge. But any gains made on the investment can remain in the UK, with no requirement to re-invest it.

Combining BIR with EIS reliefs
Companies that qualify for the Enterprise Investment Scheme (EIS) will also often qualify for BIR, and it is possible for investors to benefit from EIS tax reliefs and BIR on the same investment. EIS tax reliefs include income tax relief of 30% of the amount invested and tax-free gains subject to certain conditions.

Visit our Growth EIS page for more information on EIS tax relief.

The following case study shows how this might work in practice:

Mr Ronaldo has been living in London for the last five years, but he is originally from Uruguay and he is not UK domiciled. During a successful international career, he has built up a portfolio of business interests and investments outside the UK that generate significant income.

He now wants to bring £100,000 of his overseas income into the UK, not least to contribute to the expected cost of his children’s education in the future.

Without tax planning
When Mr Ronaldo remits £100,000 to the UK, he becomes subject to an immediate tax charge of 45%. He invests the remaining £55,000 into a fund, selling his holding four years later when his daughter is due to start university. The investment yields a gain of 20% (£11,000), which is subject to Capital Gains Tax at 20%, leaving him with £63,800.

Using BIR and EIS
Mr Ronaldo remits £100,000 to the UK and invests the full amount into an EIS and BIR qualifying investment, within the 45 day permitted limit. No tax is due on the remittance, and Mr Ronaldo is able to claim £30,000 of income tax relief. If the investment is held for three years before being sold and then yields a gain, there will be no Capital Gains Tax to pay. Assuming a gain of £20,000, Mr Ronaldo could send his original £100,000 investment back offshore to prevent triggering a tax charge. He uses the £50,000 remaining (£30,000 income tax relief and £20,000 gain on the investment) for his daughter’s education.

Oxford Capital and BIR
It is sometimes possible for resident non-doms to combine EIS investments with BIR through Oxford Capital’s investments. If you would like to find out more about how this might work for you, please contact us on 01865 860760.

 

Estimated reading time: 2 min

 

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    1. If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.
  2. You are unlikely to be protected if something goes wrong
    1. Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here.
    2. Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
  3. You won’t get your money back quickly
    1. Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
    2. The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
    3. If you are investing in a start-up business, you should not expect to get your money back through dividends. Start-up businesses rarely pay these.
  4. Don’t put all your eggs in one basket
    1. Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    2. A good rule of thumb is not to invest more than 10% of your money in high-risk investments. https://www.fca.org.uk/investsmart/5-questions-ask-you-invest
  5. The value of your investment can be reduced
    1. The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
    2. These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

 

If you are interested in learning more about how to protect yourself, visit the FCA’s website here.