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HMRC internal manual

Residence, Domicile and Remittance Basis Manual

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HM Revenue & Customs
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Remittance Basis: Exemptions: Business investment relief: Taking proceeds offshore or investing them (s809Z9 ITA2007)

Disposal proceeds [see RDRM34450] are invested if a relevant person uses them to make a qualifying investment [see RDRM34330], whether in the same or another target company. The business investment relief provisions apply to any subsequent investment of disposal proceeds in the same way as they applied to the original investment.

Proceeds in the form of money may be temporarily placed into an account in the UK before being taken offshore or invested. When the disposal proceeds are subsequently taken offshore or invested, the money must come from that same bank account. (s809Z9(3) ITA2007)

Example 1

Ammar disposes of some of his qualifying investment for £50,000. He deposits the £50,000 proceeds into a joint bank account he holds with his wife Layan. The joint account contains UK taxed income of both Ammar and Layan.

A fortnight later, Ammar transfers £50,000 from the joint account to an account in his sole name in the Isle of Man. Ammar is regarded as having taken the proceeds of the sale of his qualifying investment offshore and thus to have taken the appropriate mitigation steps.

If Ammar had transferred the £50,000 to the Isle of Man from a different UK bank account, he would not have carried out the appropriate mitigation step and would be taxable on the foreign income or gains used to make his original investment.  
   

There may be occasions when proceeds are received in the form of property rather than money. When this happens, proceeds will be treated as having been taken offshore or invested if:

  • the property is taken out of the UK or invested in a qualifying investment, or
  • money or property of an equivalent value is taken out of the UK or invested in a qualifying investment.

The second bullet point covers situations where, for example, immovable property such as shares or land and buildings are received as disposal proceeds. If those assets are UK based it may not be possible for an individual to take them offshore or invest them. The legislation allows for something else to be taken offshore or invested in place of those assets. (s809Z9(4) ITA2007)

Where money or property of an equivalent value is taken offshore or invested, the money or property taken offshore or invested cannot be;

  • exempt property [see RDRM34070]
  • sale proceeds from the disposal of any exempt property, or
  • the disposal proceeds from an investment qualifying for business investment relief.

The money or property of an equivalent value that is taken offshore or invested will be treated as containing the same proportion of income, gains and capital that the disposal proceeds contained. (s809Z9(8) ITA2007)

The equivalent value means the market value of the property that is taken offshore at, the date of disposal of the qualifying investment or the date of the sale of the exempt property.

Example 2

Magnus, a UK resident remittance basis taxpayer, loaned £40,000 to a friend’s eligible trading company in 2012-13; he makes a valid claim to business investment relief on his Self Assessment tax return.

The £40,000 is made up of £20,000 foreign capital gains and £20,000 foreign income.

The business is successful and in 2014-15 is in a position to repay 50% (£20,000) of the loan back. The £20,000 will retain the ratio of the type of funds originally invested so will comprise £10,000 foreign capital gains and £10,000 foreign income.

As Magnus is looking to upgrade his car, his friend offers him a 6 month old company car which has a market value of £20,000. Magnus takes ownership of the car in repayment of the loan to date.

The car is now treated as deriving from £10,000 foreign capital gains and £10,000 foreign income. Magnus wants to use the car in the UK, so to carry out the appropriate mitigation step he decides to take £20,000 of his UK taxed income offshore instead. Although it is UK taxed income, the £20,000 will now be treated as deriving from the £10,000 foreign capital gains and £10,000 foreign income that Magnus originally invested. If, in the future, these funds are remitted to the UK they will be taxed as Magnus’ foreign capital gains and foreign income.  
   
Example 3

In the above example, instead of taking £20,000 of his UK taxed income offshore, Magnus decides to take offshore an antique vase purchased with £25,000 of his UK employment income. The vase has a market value of £30,000 at the time that Magnus takes possession of the car in satisfaction of the part repayment of the loan he made to his friend’s company.

Magnus has taken the appropriate mitigation step and no tax under the remittance basis is due on the disposal of his qualifying investment. The vase is now regarded as deriving from Magnus’ £10,000 foreign chargeable gains and £10,000 foreign income originally loaned to the company.

If the value of the vase had fallen to £15,000 by the time the loan was repaid, it would not be regarded as fulfilling the mitigation steps. Magnus would have to take additional property offshore to the value of £5,000.  
   

Disposal proceeds are subject to the normal remittance basis rules once they are taken offshore or invested. Subsequent actions may result in the foreign income and gains contained in the disposal proceeds being treated as a remittance.

A relevant person [see RDRM33030] may take part of the disposal proceeds offshore and invest the remaining part. Provided the full amount of the disposal proceeds are taken offshore or invested (or a combination of the two), the appropriate mitigation step will have been carried out. (s809Z9(9) and (10) ITA2007)

If a relevant person invests disposal proceeds in a target company, they must make a further claim to business investment relief. If no claim is made the relevant part of the original foreign income or gains invested is treated as having been remitted to the UK at the end of the relevant grace period [see RDRM34480]. (s809VJ ITA2007)

The investment does not have to be made by the relevant person who made the initial disposal. It is sufficient that any relevant person makes a qualifying investment.