A new elective tax regime for companies which hold investment assets as part of fund structures is being introduced in the UK from 1 April 2022.

The government hopes that the new regime will bring jobs to the UK asset management sector. It should mean that funds can use UK structures to hold their assets in a tax efficient way rather than having to use Luxembourg or Irish structures, which should reduce costs and simplify compliance.

The broad aim of the new regime is to ensure that where funds hold assets through underlying UK tax resident companies, UK investors are taxed as if they invested in the underlying assets directly and that asset holding companies pay no more tax than is proportionate to the activities they perform.

The new regime follows a review of the UK's funds regime, announced in the March 2020 budget. Rather than making changes to the existing tax regime, the government decided to introduce a new regime specifically for asset holding companies.

The rules do not apply to investments in UK land. However, changes have been made to the real estate investment trust (REIT) regime to make it slightly more attractive.

In order for the new asset holding company regime to apply, the company will have to satisfy the conditions to be a qualifying asset holding company (QAHC).

What is a qualifying asset-holding company?

A company is a QAHC if:

  • it is resident in the UK;
  • it is not a UK REIT;
  • ·no equity securities of the company are listed or traded on a recognised stock exchange, or any other public market or exchange;
  • the main activity of the company is the carrying on of an investment business. Any other activities of the company must be both ancillary to the carrying on of that business and not carried on to a substantial extent;
  • the sum of relevant interests held by investors who are not ‘category A investors’ does not exceed 30%. Category A investors include QAHCs, widely-held collective investment schemes or alternative investment funds, long-term insurance businesses, sovereign wealth funds, UK or overseas REITs, UK-property rich collective investment vehicles, pension schemes and charities. A person has a ‘relevant interest’ if, due to a direct or, in certain circumstances, indirect interest, they are beneficially entitled to a proportion of the profits available for distribution, beneficially entitled to a proportion of the assets for distribution on a winding up or have a proportion of the voting power. Where there are classes of securities that track specific profits or assets, a similar test is applied to such classes of interest but without the voting power test;
  • the company's investment strategy does not involve the acquisition of listed or traded securities, or interests deriving their value from such securities, unless the acquisition is made for the purposes of facilitating a change in control of the issuer with the result that the securities cease to be listed or traded; and
  • it has notified HMRC that it intends to be a QAHC.

Tax consequences

A gain accruing to a QAHC on a disposal of overseas property or shares which do not derive at least 75% of their market value from UK land is exempt from corporation tax on chargeable gains. QAHCs are exempt from tax on profits of an overseas property business to the extent that those profits are chargeable to a foreign tax on income corresponding to income tax or corporation tax.

The new regime should mean that funds can use UK structures to hold their assets in a tax efficient way rather than having to use Luxembourg or Irish structures, which should reduce costs and simplify compliance 

The QAHC regime will also allow deductions for interest payments that would usually be disallowed as distributions on the basis of being paid under profit participating loans and results-dependent debt, and the late paid interest rules will not apply in certain situations so that interest payments are relieved for a QAHC when accrued rather than paid. This should help to secure that, subject to transfer pricing, the QAHC is only taxed on a small profit margin.

Payments of interest by a QAHC will not be subject to withholding tax.

A premium paid when a QAHC repurchases its share capital from an individual investor will be treated as capital rather than income where, broadly, these derive from capital gains realised by the QAHC on the underlying investments. This does not apply to shares held by a person, other than a fund manager in relation to the QAHC, where the right or opportunity to acquire the securities or interest is available by reason of employment.

There will be an exemption from stamp duty and stamp duty reserve tax (SDRT) for repurchases by a QAHC of share and loan capital it has previously issued, but no stamp duty or SDRT exemption for transfers of QAHC shares.

When a company becomes a QAHC, a new accounting period begins for corporation tax purposes and its old accounting period ends. It is treated as disposing of and immediately reacquiring at market value any overseas land it holds, any loan relationships related to an overseas property business and any shares. Any tax charges are not deferred but group relief or the substantial shareholding exemption (SSE) may apply to any deemed share disposal on entry. If the SSE 12-month holding requirement is not met at the time of the disposal but the QAHC continues to hold the shares after it joins the regime, the disposal can benefit from the exemption.

There will be ring-fencing of qualifying and non-qualifying activities within the QAHC as if the QAHC comprised two notional entities, one qualifying and the other non-qualifying, so that, for example, losses from qualifying activities cannot be set off against profits of non-qualifying activities and vice versa. Where there are QAHCs making up a group for group relief purposes, there would essentially be a notional ‘qualifying group’ and a notional ‘non-qualifying group’, with group relief only available within the same type of notional group – qualifying or non-qualifying – but not between them. Tax neutral transfer of chargeable assets would be available within each of the notional separate groups, but not between these groups or between the qualifying and non-qualifying parts of the same QAHC.

For non-UK domiciled investors subject to the remittance basis, specific rules are designed to ensure that the remittance basis should apply to income and gains arising from foreign assets, even when held through a QAHC. Without these specific rules using a QAHC would convert offshore income and gains taxed on the remittance basis into UK income and gains taxed on the arising basis. However, these rules only apply to investment managers, not to third party investors.

In order to prevent the regime being used for tax avoidance, QAHCs will be subject to a more stringent application of the transfer pricing rules. The exemption for small and medium-sized entities will not apply and the 'participation condition’ will be deemed to be satisfied by all persons with relevant interests in the QAHC, irrespective of the size of their holding.

QAHCs will also be deemed to be ‘close companies’ for the purposes of the loans to participators rules.

Joining and leaving the QAHC regime

A company that wishes to be a QAHC must notify HMRC. A special rule allows QAHC status during the early days of a fund. It enables a company to be a QAHC if it meets all the conditions other than the ownership condition if it declares that there is a reasonable expectation that the condition will be met within two years.

A QAHC must take reasonable steps to monitor whether the ownership condition continues to be met in relation to it. It must notify HMRC if it ceases to satisfy any of the conditions or wishes to leave the regime. However, a non-deliberate breach of the activity condition is not treated as a breach provided that the QAHC notifies HMRC and it satisfies the condition as soon as reasonably practicable. Also, a non-deliberate breach of the ownership condition is not treated as a breach provided that no more than 50% of the relevant interests in the QAHC are owned by non-category A investors, the QAHC notifies HMRC, the QAHC has taken reasonable steps to monitor compliance with the ownership condition and the condition is satisfied within a 90 day ‘cure period’ of the day on which the QAHC became aware of the breach.

There is also a two-year wind-down period for a company that breaches the ownership provision in some circumstances and notifies HMRC that it intends to cease its QAHC ring-fence business.