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February 9, 2017

Reform can help HNWs save British business investment

By Spear's

Changes to the rules on Business Investment Relief for HNWs are long overdue, writes private wealth lawyer Daniel Bentley-White

The Bank of England has been cheerier than usual of late. After months of economic predictions ranging from apocalyptic to merely catastrophic, on Thursday last week the Bank sharply upgraded its growth forecast for 2017.

Despite this newfound optimism, however, business investment was expected to continue to fall. Funnily enough almost nobody rushed to point out that Business Investment Relief (BIR) exists to attract investment for just this purpose from high net worth individuals.

But that’s hardly surprising.

Because while BIR allows taxpayers who are resident but not domiciled in the UK to bring money into the country without it being taxed on the remittance basis, (so long as it is invested in a qualifying unquoted business), the reality doesn’t work out quite as it should. Indeed, it’s a wonderful idea in theory, but then so was the Titanic.

To start with, the provisions on what sorts of investments qualify are unnecessarily restrictive, and limited only to a loan or a subscription to new shares. The rules on what the investor should do if their investment no longer qualifies (for example, because they withdraw the funds or the business stops trading) are a complex mess of arbitrary time limits and technical jargon, which an investor will have real difficulty following without hand-holding from a professional adviser.

Worse, confidence is undermined by the broad extraction of value rules. If any benefit not on commercial terms is received by a ‘relevant person’ from the target company or a connected company, directly or indirectly, regardless of whether the investor had control or even knowledge of it, BIR is clawed back on the entire fund.

The aim is to catch crafty remittances to the investor’s family, but when a ‘relevant person’ can be a company controlled by a company which is the loan debtor of a trustee of a trust which has as a possible beneficiary the grandchild of the cohabitee of the investor, arguably it’s gone a smidge too far.

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The risk of suffering a large unexpected tax charge is too great for most to stomach, and as a result, in part, BIR boasts a fairly paltry take-up of between 200 and 400 taxpayers per year.

In fairness, the Finance Bill which comes into force on 6 April 2017 contains some welcome changes. Existing shares will qualify rather than just freshly issued ones; start-up allowances for new companies will be increased from two years to five years; extraction of value will only apply where the benefit arises from the investment.

Remittance basis users should still contain their excitement over BIR, however difficult that may be. The reforms are nice, but suffer from a lack of ambition. The government claims that it will continue to develop BIR in future, and there are a number of changes it may be well advised to implement.

It would make sense to simplify the whole system; trim back the benefit rules; introduce proportionality, to stop a negligible benefit compromising BIR on the entire investment; and allow the investor to maintain the relief if the target company becomes quoted – BIR exists in large part to drive business growth, after all.

This is not to imply that a radically overhauled BIR will definitely become a perfect vehicle for remittance basis users, leading to a surge of UK investment, record growth, zero unemployment, and free cake for all. But it might.

Daniel Bentley-White works at boutique private wealth law firm Maurice Turnor Gardner LLP.

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