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For investments made before 6 April 2017 the 2-year start-up rule required a target company to be operational within two years of making the qualifying investment and to remain operational from then on.

The 2-year start-up rule is breached if:

• the target company was non-operational two years after the day the investment was made , or
• at any time after the end of the two year period, the company becomes non-operational.

For investments made after 6 April 2017, the start-up rule changed from 2 to 5 years. The 5-year start-up rule requires a target company to be operational within five years of making a qualifying investment and to remain operational from then on.

The 5-year start-up rule is breached if:

• the target company was non-operational five years after the day the investment was made
• at any time after the end of the five-year period, the company becomes non-operational.

For the five-year limit to apply the investment must be made on or after 6 April 2017. For investments made prior to this date the two-year start-up rule applies.

If the target company is an eligible trading company [see RDRM34345], non-operational means that the company is not actually carrying out a commercial trade.

Example 1a

Gabrielle invests in company A Limited on 10 April 2012 and receives newly issued shares. A Limited continually delays trading so by 11 April 2014 A Limited has never traded. The 2-year start-up rule has been breached. A Limited is non-operational immediately after the end of the two year period (s809VH(5)).

If instead

Example 1b

Gabrielle invests in company A Limited on 10 April 2017 and receives newly issued shares. A Limited continually delays trading so by 11 April 2022 A Limited has never traded. The 5-year start-up rule has been breached. A Limited is non-operational immediately after the end of the five-year period.

Example 2

Einar invests in company B Limited on 10 April 2012 and receives newly issued shares. B Limited needs to carry out research and development (R&D) prior to trading commencing (s809VE(4)). R&D takes place from 10 April 2012 to 31 January 2014; trading commences on 1 February 2014. The 2-year start-up rule has been met and Elinar鈥檚 investment meets this criterion for business investment relief.

Example 3

Dalton invests in company C Limited on 10 April 2012 and receives newly issued shares. C Limited needs to carry out R&D prior to actual trading commencing. R&D is initially forecast to take place from 10 April 2012 to 31 March 2013, however, due to a breakthrough in research and subsequent change in C Limited鈥檚 target market, R&D is extended to 31 July 2014. C Limited actually commences trading on 1 August 2014. As the extended R&D has benefited the commercial trade of C Limited it is treated as carrying on a commercial trade (s809VE(4) ITA 2007) and the 2-year start-up rule has not been breached.

Example 4

Astrid invests in company D Limited on 10 April 2017 and receives newly issued shares. D Limited intends to trade but needs to carry out R&D first. By 11 April 2022 D Limited has neither commenced trading nor started R&D. The 5-year start-up rule has been breached as preparing to carry on R&D activities (s809VE(5) ITA 2007) is not a commercial trade for the purposes of s809VD.

If the target company is an eligible stakeholder company [see RDRM34350], non-operational means that the company:

• holds no investments in eligible trading companies, or
• none of the trading companies in which it holds investments is carrying out a commercial trade.

If the target company is an eligible holding company [see RDRM34355], non-operational means:

• the group in which the company is a member is not an eligible trading group [see RDRM34345] or,
• none of its 51% subsidiaries is carrying out a commercial trade.

If the target company is an eligible hybrid company (see RDRM34358), non-operational means that the company is not trading and:

• it holds no investments in eligible trading companies
• none of the eligible trading companies in which it holds investments is trading

Example 5

Ragnar invests in E Limited in August 2014 and receives newly issued shares. The company is an eligible holding company which has three subsidiaries:

- F Limited which never actually undertakes any commercial trade;

- G Limited which is trading but is sold to a competitor 18 months after Ragnar鈥檚 investment and

- H Limited which is bought out by the employees 21 months after Ragnar鈥檚 investment and so ceases to be a member of the group.

As E Limited no longer holds any trading subsidiaries carrying out commercial trades, for the purposes of the business investment relief it ceases to be an eligible trading group when H Limited leaves the group. Ragnar will have to take the appropriate mitigation steps to prevent a UK taxable remittance arising.

Where either the 5 year (for investments made in 2017-2018 onwards), or the 2-year (for investments made up to 5 April 2017), start-up rule is not met there will be a potentially chargeable event and a taxable remittance of the foreign income or gains will occur unless the appropriate mitigation steps [see RDRM34440] are taken. (s809VH(5), (6) and (7) ITA2007)

Where more than one investment is made in a qualifying company or group, if there is a mixture of both qualifying and non-qualifying investment, it is only the qualifying investments that must be disposed of when a potentially chargeable event occurs. (s809VG(5) ITA2007)

Example 6

Sigmund has owned 100% of the shares in a qualifying trading company (J Limited) since he came to the UK in 2005. He had purchased the shares from an unconnected party for 拢100,000 using UK taxed income and gains. As this transaction took place before the business investment relief was introduced it is not a qualifying investment.

In 2013-2014 Sigmund invests a further 拢100,000 of his foreign income and receives 100 newly issued shares in J Limited in return. Sigmund makes a valid claim to business investment relief on his tax return and the foreign income is not treated as remitted at that time.

In 2015-2016 J Limited sells its trade to an unrelated third party and becomes an investment company. As J Limited is no longer a qualifying company this is a potentially chargeable event and Sigmund must take the appropriate mitigation steps if he wants to avoid his foreign income being remitted. Sigmund arranges for J Limited to buy back the 100 shares issued in 2013-2014 for their current market value of 拢100,000 which he takes offshore immediately.

Sigmund does not have to dispose of the shares purchased in 2005 as these were not qualifying investments.

For insolvency see RDRM34390.