HMRC has published guidance on updates to the business investment relief (BIR) rules, which apply from 6 April 2017 and mean a qualifying investment can now be made by acquiring existing shares in a target company, amongst other changes
A new category of qualifying target company, the ‘eligible hybrid company’ has been added to the target company list.
This is defined as a private limited company which is not an eligible trading or stakeholder company; carries on one or more commercial trades or may do so within the next five years; holds one or more investments in eligible trading companies or may do so within the next five years; and carries on commercial trades and makes investments in eligible trading companies for all, or substantially all, of what it does.
For eligible hybrid companies, ‘non-operational’ means either that it is not trading, and it holds no investments in any eligible trading companies, or that none of the eligible trading companies it holds investments in are trading.
The updated legislation also introduces a new requirement that trade should be commercial, that is, conducted on a commercial basis with a view to making profits. Whether carrying on a commercial trade is all or substantially all of a trading company’s activities will depend on a consideration of all the relevant facts.
HMRC says the phrase ‘all or substantially all’ is not in the legislation, but if the relevant trade accounts for at least 80% of the company’s total activities, it will generally be regarded as meeting this requirement.
A company which is a partner in a partnership will not be regarded as carrying on a trade if the trade is carried on by the partnership. Since the commercial trade test conditions are not met, the company will not qualify for BIR.
To qualify for BIR, the company must have commercial trade in its own right separate from the partnership, and satisfy the other qualifying conditions.
When a qualifying investment is made, situations might arise which are treated as a potentially chargeable event, such as a breach of the five year start-up rule, or the company in which the investment was made ceases to be eligible.
When a potentially chargeable event occurs the investor has time limits, called grace periods, in which to take the appropriate mitigation steps.
The guidance explains that three of the four grace periods remain unchanged. However, from 6 April 2017 the extraction of value rule will only be breached if the relevant person receives value in circumstances that are directly or indirectly attributable to their investment and they fail to take the appropriate mitigation steps.
As a result, an extraction of value event with the same facts could have different outcomes if it occurred before or after 6 April 2017.
In addition, if an investor disposes of some or all of their holdings in an eligible hybrid company, as well as any of the three existing eligible company categories they have to take the appropriate migration steps so that the foreign income or gains that was originally invested is not treated as remitted to the UK.
Before 6 April 2017, if someone invested in a target company that had not started trading, to meet the conditions for BIR the company had to start trading within two years of the investment being made, and must not become non-operational after the end of the two year period
From 6 April 2017 the start-up period has been extended to five years for both trading purposes and if a company becomes non-operational. The investment must be made on or after 6 April 2017.
