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HMRC internal manual

Residence, Domicile and Remittance Basis Manual

Remittance Basis: Exemptions: Business investment relief: Potentially chargeable events - the extraction of value rule

The extraction of value rule is breached if any relevant person receives value from a company that is directly or indirectly linked to the investment. An extraction of value can be either money or money’s worth received by or for the benefit of any relevant person.

If a breach of the extraction of value rule occurs, the taxpayer will be treated as having made a taxable remittance of all of their foreign income or gains invested unless they take the appropriate mitigation steps [see RDRM34440]. (s809VH(1)(c) and (2) ITA2007)

Example 1
Jaques has made a qualifying loan off £500,000 to an eligible trading group of hotels with extensive leisure facilities. On his 50th birthday, the group treats Jaques and his wife to a golfing and spa break at no cost to the couple. This break is not provided on arm’s length terms and, as neither Jaques nor his wife is a director or employee of the group, the benefit is not liable to UK tax. If Jaques does not take the appropriate mitigation steps he will have made a taxable remittance of £500,000.  

Any payments received in respect of a disposal which is itself a potentially chargeable event is not treated as an extraction of value.

The extraction of value rule is not breached where the value received by a relevant person is:

  • subject to income tax or corporation tax or would be if the relevant person were liable to such tax, and
  • paid or provided to the relevant person in the ordinary course of business and on arm’s length terms.

So, for example, where an individual makes a qualifying investment in a company of which they are a director, the receipt of director’s remuneration on commercial terms and taxable in the UK would not constitute an extraction of value. (s809VH(3) ITA2007)

Example 2

Nelka sets up a trading company, Nelka Fashions Limited, and asks Luther to invest in it. Luther invests £1 million of his foreign income in the company which is an unlisted private limited company for which he receives newly issued shares.

Nelka Fashions Limited trades successfully and pays dividends to its shareholders, which Nelka and Luther declare on their respective tax returns. This is a commercial return on the investment and is not a potentially chargeable event.

Subsequently Nelka Fashions Limited acquires an interest in a flat in Wimbledon together with tickets for Centre Court for each day of the tennis tournament with the intention to use these for marketing and publicity purposes. Instead, Luther and his family stay in the flat and use the tickets.

Unless Luther takes the appropriate mitigation steps, he will be treated as having made a taxable remittance of £1 million, as the use of the flat and the tickets have not been provided on arm’s length terms.

If Luther pays the commercial rate to Nelka Fashions Limited for the use of the flat and tickets, there has not have been an extraction of value by Luther and he does not have to take any mitigation steps.  

The extraction of value rule will be triggered by the receipt of value from:

  • an involved company, or
  • anyone else in circumstances directly or indirectly attributable to the investment.

An involved company is:

  • the company in which the qualifying investment was made
  • if the investment is in an eligible stakeholder company [see RDRM34350], any eligible trading company [see RDRM34345] in which the stakeholder company has invested or intends to invest
  • if the investment is in an eligible holding company [see RDRM34355], any 51% subsidiary that is an eligible trading company
  • any company connected with any of the above.

If there is an extraction of value, the investor must take the appropriate mitigation steps [see RDRM34440] to avoid a remittance.

Example 3

Raphael invests in a target company, E Limited, which produces light aircraft engines and receives newly issued shares in exchange for his investment.

E Limited’s sister company, F Limited, produces the aircraft body and assembles the completed aircraft.

Raphael’s wife Carmela holds a light aircraft flying licence and F Limited makes available a company aircraft for her personal use free of charge as a thank you for the investment.

Carmela is a relevant person [see RDRM33030], there has been an extraction of value, and the investment also fails under Condition B [see RDRM34360] as the benefit is related. It would not have been given but for Raphael’s investment.

Raphael will have to take the appropriate mitigation steps if he wants to avoid a remittance.