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Business Investment Relief: The Added Advantages

By Ray Eugeni, Partner at Deepbridge Capital LLP

Business Investment Relief (‘BIR’) was introduced following the financial crisis to promote investment in the UK and to encourage UK resident non-domiciled individuals to invest overseas income and gains.

BIR allows UK Resident non-domiciliaries, to bring non-UK source income and gains into the UK without a UK tax charge. In addition, there is nothing to prevent UK-taxpaying investors claiming other reliefs, such as those available under the Enterprise Investment Scheme (EIS).

Any investments made within the UK, with overseas income or gains and by a non-domiciled resident, must be carefully considered and planned, otherwise investors could unintentionally become liable for UK tax. EIS-qualifying companies may be a good place for non-domiciliaries to initially look when considering BIR opportunities, as the qualifying criteria for EIS companies is more stringent than those for BIR; meaning investors can be more confident that their investments are sound.

Some simple rules for BIR qualification are that the Company must be a private limited company which is carrying out a commercial trade, and the investment must be made within 45 days of the offshore income and/or gains being brought into the UK.

BIR investments can be in the form of shares or loans. However, we are looking at the compatibility with EIS and it should, therefore, be noted that it is a requirement that investors are owners of an EIS-qualifying company’s shares; with loans not an option.

EIS is one of the most tax-advantaged government schemes in the world, with opportunities to mitigate income tax, capital gains tax and inheritance tax; designed to support growth-focused, early-stage and unquoted companies to raise funding they may have otherwise struggled to attract due to their early stage and therefore higher risk status.

Investors may claim up to 30% income tax relief, up to a maximum individual investment of £2m per tax year, subject to at least £1m being invested in Knowledge Intensive Companies.

Carry Back also allows income tax relief claims to be made such that an investment is treated for income tax relief purposes as having been made in the previous tax year, meaning income tax relief can be offset against the previous tax year as well as the current tax year.

Capital Gains Tax, of unlimited gains on the sale of any assets, may also be deferred if an EIS investment is made within one year before or three years after the date of the disposal of the assets which give rise to a gain.  It is important to also consider that there is no capital gains tax on the disposal of shares which have been held for at least three years in companies which are EIS-qualifying.

In addition to the significant income tax and capital gains tax incentives, EIS companies also benefit from 100% Inheritance Tax exemption, through the availability of Business Relief after EIS qualifying investment has been held for at least two years and remains held on death.

Further to all of the above incentives, EIS holdings also benefit from Share Loss Relief, which could provide total tax relief of up to 61.5%, including income tax relief, for a 45% tax payer.

Importantly, investment must be held for a minimum of three-years to qualify for EIS reliefs but as the underlying companies are unquoted stocks, the holding period may be significantly longer until an appropriate investor exit is achieved; usually via a trade sale or IPO.

BIR, and importantly EIS-qualifying companies, offers UK resident non-dom individuals the unique opportunity to access highly innovative and growth-focused UK companies at an early stage in their growth cycle.  With an increasingly tech-focused world, the UK is widely regarded as one of the great places to start a tech business.  Indeed, according to the Tech Nation Report 2021, the level of venture capital investment in UK tech companies in 2020 was third in the world behind only the United States and China, with over twice the level of investment than Germany and almost three-times that of France.

As the UK Prime Minister, the Rt Hon. Boris Johnson MP, stated in his foreword in the Tech Nation  Report 2021:

“2020 saw UK companies attract more than twice as much VC funding as our nearest European competitor. London alone benefited from more investment than the next three leading cities put together.”

“Unicorns now roam the streets of cities across England, Scotland and Wales. This isn’t just great news for the entrepreneurs and thinkers and do-ers who make the British tech industry what it is. As the sector grows and grows it contributes more and more to our economy, a silicon supercharge that benefits us all.”

Investing in early-stage UK companies is hot property and for UK resident non-doms, there are significant opportunities to join this growth story whilst doing so in a highly tax efficient manner.

Deepbridge is a multi-award winning EIS Manager with over £200m of funds deployed into early-stage and growth-focused companies in the UK.

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