RDRM34345 | Remittance Basis: Exemptions: Business investment relief: Condition A - Eligible Trading Company (s809VD(2) ITA2007)

Prior to 6 April 2017 an eligible trading company was a private limited company which was;

• carrying on at least one commercial trade, or

• preparing to do so within two years of the date on which the funds to be invested were brought to the UK (this is the 2 year start-up rule) [see RDRM34430]

and

• carrying on a commercial trade is all or substantially all it does, or it is reasonably expected to do once it begins trading.

From 6 April 2017 the start-up rule has been extended to 5 years for trading purposes, the remaining conditions are unchanged. However, for this to apply, the investment must be made no earlier than 6 April 2017. For any investment made prior to this date the 2-year start-up condition will continue to apply.

For business investment relief purposes, there is an additional requirement that the trade should be commercial, that is conducted on a commercial basis with a view to making profits.

The phrase ‘all or substantially all’ (see third bullet above), is not defined in the legislation. Whether or not carrying on a commercial trade is all or substantially all of a trading company’s activities will depend on consideration of all the relevant facts. However, where carrying on a relevant trade accounts for at least 80% of a company’s total activities, the company will generally be regarded as meeting this requirement. Further guidance on what is a trade can be found in the Business Income Manual at BIM20050.

Trade also includes:

• any activity that is treated as if it were a trade for Corporation Tax purposes. This includes farming or market gardening, the commercial occupation of land (but not woodland) and the profits of mines, quarries and other concerns

• a business of generating income from land. This will include profits arising from the renting or leasing of land or property.

• a company carrying on research and development activities which are intended to lead to a commercial trade. However, preparing to carry out research and development activities is not itself a commercial trade for the purposes of the business investment relief.

The extension of the definition of trade to include generating income from land and research and development activities only applies for business investment relief purposes. It does not change the definition of trade for other tax purposes. (s809VE ITA2007)

Example

Constance is a remittance basis taxpayer who intends to invest £100,000 of her foreign income and gains in Sparks Moore Limited, a company which produces electronic components for a well known car manufacturer. The company is a private limited company which is not listed on a recognised stock exchange and is carrying out a commercial trade.

Sparks Moore Limited is therefore an eligible trading company for the purposes of the business investment relief.

Partnerships

To put the matter beyond doubt, for the purposes of BIR, a company which is a partner in a partnership, will not be regarded as carrying on a trade carried on by that partnership. As such, it will not meet the commercial trade test and will not qualify for BIR. However, if the target company was carrying on a commercial trade in its own right – a commercial activity separate, and distinct from the partnership, it may qualify for BIR as long as all other qualifying conditions were met.