Tax Breaks for Investment in This Year’s Budget Could Provide a Small Fillip to the UK Economy
Measures are expected around the time of this month’s budget that could provide a small fillip to the UK economy by making certain types of investment in UK businesses more attractive from a tax perspective, according to KPMG in the UK. David Kilshaw, chair of private client advisory at KPMG in the UK, explains:
“A ‘giveaway’ budget is not on the cards but there are changes expected on targeted tax incentives for investment that could be very valuable. Amendments to the non-dom rules to allow them to invest in qualifying UK businesses could open the door to monies flowing into the UK. And the introduction of a new Seed funding regime plus changes to existing enterprise investment schemes should make these investments more attractive to business angels, entrepreneurs and high net worth individuals.”
The key tax incentives expected for investment are:
changes to the non-dom tax rules around investing monies held offshore into the UK,
enhancements to the Enterprise Investment Scheme and Venture Capital trust rules, and
the introduction of the new Seed Enterprise Investment Scheme.
Non-Doms investing in the UK
Looking first at the non-dom rule changes: currently bringing monies held offshore to the UK can result in a “remittance” tax charge of up to 50 percent but these rules are set to change from this April allowing tax relief on monies brought in for investment purposes, provided they meet certain criteria.
David Kilshaw, chair of private client advisory at KPMG in the UK, explains: “Imagine the scenario…. A non-dom (“Mr Non-Dom”) has been resident in the UK for a number of years and has always opted for the remittance basis of taxation (under which only foreign income and foreign chargeable gains that he brings into the UK are subject to UK tax). An interesting business opportunity is put to him to invest in a UK trading company.
“However, over the years he has used up all funds that have already been taxed in the UK and any offshore capital (ie monies which can be remitted to the UK tax free). The only monies he has available to remit to the UK would be subject to a tax bill for Mr Non-Dom of up to 50 percent – increasing the effective cost of his investment. Investing £1m would cost him £1.5m, because half as much again of the cost of the investment would go to the Revenue.
“However, we expect new rules to be unveiled around the time of the budget to change this situation. According to proposals that have been out for consultation, an exemption for non-doms is on the cards under which they can invest monies into businesses tax free. There are some restrictions: the businesses must either be carrying out a trading activity or undertaking the development of commercial property (not residential) and the investment must be in actual companies, not in sole traders or partnerships. But there are no upper or lower limits to the level of investment – which is positive for those with deep pockets who see the UK as a good business opportunity.”
EIS, VCT and the SEIS
KPMG is also expecting confirmation of enhancements to the Enterprise Investment Scheme (“EIS”) and Venture Capital Trust (“VCT”) rules and further information on a new Seed Enterprise Investment Scheme (“SEIS”) targeted at smaller businesses due to be launched in April this year. Proposed changes to the EIS and VCT rules will substantially broaden the scope of the relief, doubling the size of qualifying investment per individual from £500,000 to £1m a year and allowing investments into larger companies than under the current rules.
David Kilshaw commented: “Enhancements to the EIS and VCT rules plus the introduction of the new SEIS for smaller businesses should hopefully act as a catalyst for investment and growth. However while they offer useful tax incentives, these rules are complicated and it’s a good idea to take detailed tax advice if you are considering any of these types of investment.”
However, it is not all good news for non-doms in the budget, explains David Kilshaw, as the annual charge levied in order to be taxed on the so-called “remittance” basis is set to rise from £30,000 to £50,000 for longer term non-doms. David continued:
“Long-term UK resident non-doms will see their annual charge for being taxed on the remittance basis jump by two thirds as it rises from £30,000 a year to £50,000. It’s possible that some will decide that it’s no longer worth paying this annual charge and they may opt to be taxed on an ‘arising’ basis under which their worldwide income will be subject to UK tax. If they haven’t already looked at some calculations to work out how this affects them, they need to do so soon in order to be able to make a decision as to whether they want to reorganise their affairs.”