RDRM34440 - Remittance Basis: Exemptions: Business investment relief: Appropriate mitigation steps (s809VI ITA2007)
Where there is a disposal of the investment
Where an investor disposes of all or part of their holding in the company, if they wish to avoid a remittance, they must:
- take the proceeds [see RDRM34450] offshore, or
- reinvest them in another qualifying investment [see RDRM34330], or
- a combination of the two.
See RDRM34460 for more information about what these steps involve. This must be done within the relevant grace period [see RDRM34480]. (s809VI(1) ITA2007)
Up until 22 November 2017 the investor could have used some of the disposal proceeds to make a tax deposit [see RDRM34500].
Amount ‘X’
In the case of full or part disposals, the investor is required to take the whole of the disposal proceeds offshore (or reinvest them), up to the amount originally invested. Where a partial disposal is made, the individual must calculate an amount, called ‘amount X’, to determine how much of the disposal proceeds should be taken offshore or reinvested. (s809VI(1) to (4).
Amount X is calculated as:
- the sum originally invested, less
- any part of that sum that has previously been
- treated as remitted to the UK, or
- sent offshore or invested in another qualifying investment, or
- used to make a tax deposit on a previous part disposal (only up until 22 November 2017).
From 23 November 2017 the certificate of tax deposit scheme closed, this means that from that date Amount X is calculated as follows:
- the sum originally invested, less
- any part of that sum that has previously been
- treated as remitted to the UK
- sent offshore or invested in another qualifying investment
If the disposal proceeds exceed amount X, the individual has only to take offshore or reinvest amount X.
Example 1
Luther has made a qualifying investment of £1 million in Nelka Fashions Limited. The company flourishes, and after several years, Luther decides to dispose of half of his holding. The disposal proceeds are £1,200,000.
There have been no prior potentially chargeable events so amount X is £1 million (the amount originally invested). This is less than the disposal proceeds of £1,200,000 so Luther is only required to take £1 million offshore in order to take the appropriate mitigation steps.
There is also a capital gain of £700,000 (proceeds £1,200,000 less cost of £500,000) that Luther will report on his Self Assessment tax return for the year of disposal.
Example 2
Rory brings £1 million of his foreign income to the UK and invests in an eligible trading company for which he acquires 1,000 newly issued shares.
Twelve months later Rory sells 250 shares for £325,000. The acquisition cost of these shares is £250,000 so there is a UK capital gain of £75,000. As amount X is £1 million, Rory must take the entire £325,000 offshore or reinvest it in a target company if he is to avoid a taxable remittance of the £250,000 used to buy the shares. Rory accordingly takes £325,000 offshore.
In the following tax year Rory sells a further 250 shares for £450,000 which gives rise to a UK capital gain of £200,000. Amount X is now £675,000 - that is the original investment of £1 million less the amount of £325,000 previously taken offshore. Rory must again take the entire proceeds of £450,000 offshore or reinvest in an eligible company to avoid a taxable remittance of £250,000. Rory takes £450,000 offshore.
Five years later Rory sells his remaining 500 shares for £2,500,000, making a UK capital gain of £2 million. At this point Rory has taken offshore £775,000 of his original £1 million qualifying investment, amount X is now £225,000. Rory must therefore take a further £225,000 offshore or reinvest it if he is to avoid a taxable remittance of £500,000. The remaining £2,275,000 can be retained in the UK.
Where there is another chargeable event
If the potentially chargeable event is something other than a disposal, that is, where:
- the target company ceases to qualify as an eligible company
- the extraction of value rule is breached, or
- the 5-year start-up rule is breached. (previously 2 years before 6 April 2017)
the relevant person must dispose of their entire holding, or as much of it as they still hold, within the relevant grace period [see RDRM34480] and then take the mitigation steps outlined above if the full amount of the foreign income or gains that were originally invested are not to be treated as remitted to the UK.
If only part of the holding is disposed of rather than the entire holding, the full amount of the foreign income or gains originally invested will be treated as remitted to the UK and not just the portion left invested in the company. (s809VI(2))
If the appropriate mitigation steps are taken for the entire holding or as much of it as the relevant person still holds, the foreign income or gains used to make a qualifying investment will continue to be treated as not remitted to the UK.