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HMRC internal manual

Residence, Domicile and Remittance Basis Manual

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Remittance Basis: Exemptions: Business investment relief: Potentially chargeable events - 2-year start-up rule

The 2-year start-up rule requires a target company to be operational within two years of making the qualifying investment and to remain operational from then on.

The 2-year start-up rule is breached if:

  • the target company was non-operational two years after the day the investment was made , or
  • at any time after the end of the two year period, the company becomes non-operational.

If the target company is an eligible trading company [(see RDRM34345], non-operational means that the company is not actually carrying out a commercial trade.

Example 1
Gabrielle invests in company A Limited on 10 April 2012 and receives newly issued shares. A Limited continually delays trading so by 11 April 2014 A Limited has never traded. The 2-year start-up rule has been breached. A Limited is non-operational immediately after the end of the two year period (s809VH(5)).  
   
Example 2
Einar invests in company B Limited on 10 April 2012 and receives newly issued shares. B Limited needs to carry out research and development (R&D) prior to trading commencing (s809VE(4)). R&D takes place from 10 April 2012 to 31 January 2014; trading commences on 1 February 2014. The 2-year start-up rule has been met and Elinar’s investment meets this criterion for business investment relief.  
   
Example 3
Dalton invests in company C Limited on 10 April 2012 and receives newly issued shares. C Limited needs to carry out R&D prior to actual trading commencing. R&D is initially forecast to take place from 10 April 2012 to 31 March 2013, however, due to a breakthrough in research and subsequent change in C Limited’s target market, R&D is extended to 31 July 2014. C Limited actually commences trading on 1 August 2014. As the extended R&D has benefited the commercial trade of C Limited it is treated as carrying on a commercial trade (s809VE(4) ITA 2007) and the 2-year start-up rule has not been breached.  
   
Example 4
Astrid invests in company D Limited on 10 April 2012 and receives newly issued shares. D Limited intends to trade but needs to carry out R&D first. By 11 April 2014 D Limited has neither commenced trading nor started R&D. The 2-year start-up rule has been breached as preparing to carry on R&D activities (s809VE(5) ITA 2007) is not a commercial trade for the purposes of s809VD.  
   

If the target company is an eligible stakeholder company [see RDRM34350], non-operational means that the company:

  • holds no investments in eligible trading companies, or
  • none of the trading companies in which it holds investments is carrying out a commercial trade.

If the target company is an eligible holding company [see RDRM34355], non-operational means:

  • the group in which the company is a member is not an eligible trading group [see RDRM34345] or,
  • none of its 51% subsidiaries is carrying out a commercial trade.
Example 5

Ragnar invests in E Limited and receives newly issued shares. The company is an eligible holding company which has three subsidiaries:

  • F Limited which never actually undertakes any commercial trade;

  • G Limited which is trading but is sold to a competitor 18 months after Ragnar’s investment and

  • H Limited which is bought out by the employees 21 months after Ragnar’s investment and so ceases to be a member of the group.

As E Limited no longer holds any trading subsidiaries carrying out commercial trades, for the purposes of the business investment relief it ceases to be an eligible trading group when H Limited leaves the group. Ragnar will have to take the appropriate mitigation steps to prevent a UK taxable remittance arising.  
   

Where the 2-year start-up rule is not met there will be a potentially chargeable event and a taxable remittance of the foreign income or gains will occur unless the appropriate mitigation steps [see RDRM34440] are taken. (s809VH(5), (6) and (7) ITA2007)

Where more than one investment is made in a qualifying company or group and one or more of the investments is a qualifying investment and one or more of the investments is not a qualifying investment, it is only the qualifying investments that must be disposed of when a potentially chargeable event occurs. (s809VG(5) ITA2007)

Example 6

Sigmund has owned 100% of the shares in a qualifying trading company (J Limited) since he came to the UK in 2005. He had purchased the shares from an unconnected party for £100,000 using UK taxed income and gains. As this transaction took place before the business investment relief was introduced it is not a qualifying investment.

In 2013-14 Sigmund invests a further £100,000 of his foreign income and receives 100 newly issued shares in J Limited in return. Sigmund makes a valid claim to business investment relief on his tax return and the foreign income is not treated as remitted at that time.

In 2015-16 J Limited sells its trade to an unrelated third party and becomes an investment company. As J Limited is no longer a qualifying company this is a potentially chargeable event and Sigmund must take the appropriate mitigation steps if he wants to avoid his foreign income being remitted. Sigmund arranges for J Limited to buy back the 100 shares issued in 2013-14 for their current market value of £100,000 which he takes offshore immediately.

Sigmund does not have to dispose of the shares purchased in 2005 as these were not qualifying investments.  
   

For insolvency see RDRM34390.