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Wednesday, May 20, 2015

Changes to the UK Investor Visa

Tier 1 (Investor) visas were introduced in 2008 to allow individuals with at least £1m available to invest to remain in the UK on a long-term basis. They are seen as a shortcut for wealthy foreign nationals to become British citizens. Surprisingly, Chinese nationals accounted for 43% of all Tier 1 visas issued last year. Of the minimum £1m capital invested, no less than £750,000 must be invested in UK government bonds, share capital or loan capital in active and trading UK registered companies. The remaining £250,000 can be invested in other UK assets such as un-mortgaged UK property or cash held in a UK bank account. One challenging condition is that if the value of the investor’s overall investment drops below the £1m threshold at any point during the visa application period, it must be ‘topped up’ by the next reporting period and as such, the portfolio should be cognisant of changes in market movements.
A temptation would be to invest entirely in low risk assets such as UK government bonds but that might not necessarily be the ‘risk-free’ option in the current macro-economic environment, with the requirements for keeping the portfolio’s book value above the £1m threshold. However on February 26th, 2015, the Home Office announced significant changes to the Tier 1 visa immigration rules and these changes will come into effect on November 6th of this year.

Changes include raising the minimum investment threshold from £1m to £2m whilst the full investment sum must be invested in permissible investments rather than 75% of the total as under the previous rules. It is also no longer acceptable to source the investment sum by loan. Most interestingly, the ‘topping up’ requirement has been removed and instead, investors will need to purchase new qualifying investments only if they sell part of their portfolios. The increase in threshold from £1m to £2m is substantial but investors are afforded a higher degree of freedom, likely meaning that this scheme will remain attractive for high net worth individuals seeking to gain a foothold in the UK.

Any visa applications submitted before November 6th, 2014, will be considered in accordance with current rules and clients who have already held a Tier 1 visa would not be affected by the new rules, since they do not have a retrospective effect. Nonetheless, the increase in flexibility has allowed new Chinese Tier 1 clients to adjust the risk levels of their portfolios more freely.

The removal of the requirement for portfolio top up will lead to many investors building a portfolio wholly made up of UK government bonds, due to the principle being safely retained whilst earning a coupon payment on the bonds. This scheme offers a lower opportunity cost than taking investment risk for higher returns, given that the primary purpose of the investment is to achieve British Citizenship. Amid the uncertainty surrounding the 2017 Brexit referendum, a growing number of multi-asset fund and wealth managers are reducing their holdings of UK equities. Many Chinese Tier 1 clients will opt to invest heavily in UK government bonds despite the all-time high reached by the FTSE 100 this week.

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