This post was written by Annette Beresford.

Next year could bring some interesting changes for non-UK domiciled investors in UK business who pay tax in the UK on the remittance basis.  This is noteworthy for funds seeking to attract investment from non-domiciles with offshore income.310/365 - Count the coins... By The Travelling Bum - NEED TO CATCH UP!

The Government is consulting on a proposal to allow the tax-free use of offshore income and gains in the UK when the funds are invested in a company that carries on a “qualifying business” in the UK (click here (PDF) for a copy of the consultation paper).  This includes businesses that carry on a trading activity or that undertake the development or letting of commercial property.  Under current rules, the use of offshore income or gains in the UK by a non-domiciled person results in a charge to UK tax.

The relief will be restricted to investments in companies and may therefore affect an investor’s choice of business vehicle.  However, offshore funds seeking to avoid a UK tax presence are unlikely to benefit, as foreign companies must have a UK permanent establishment in order to receive tax-free investments.

As the proposal is currently under consultation, there may be changes prior to the intended effective date of 6 April 2012.

Key points of the proposal:

  • To qualify for tax-free treatment, the investment must be made through a company which is UK resident or has a permanent establishment in the UK.  The Government is considering whether to include listed companies.
  • Investments in a company that develops commercial or residential property as its trade will be permitted as well as investments in certain types of residential property such as nursing homes or hospitals where a commercial trade is carried on.  However, the letting of residential property will not qualify.
  • An investment may be made through subscribing for or acquiring share or loan capital in the company (or a mixture).  There will be no restriction on the size of the investment.  The investment may be made directly by the non-domiciled person or through any kind of offshore investment vehicle or trust.
  • There will be anti-avoidance provisions to prevent abuse of the relief, e.g. by making non-commercial payments (such as inflated salaries or non-commercial loans) to ‘leak out’ the value of the investment to the individual.  Non-domiciles will be prevented from selling a business they already own to a new company funded by overseas income.
  • If the investment is disposed of, the proceeds must be taken out of the country within two weeks or be reinvested in another qualifying business within two weeks.  If this is not done, the offshore income and gains originally invested will become subject to UK tax in accordance with normal rules.