UK asset holding companies consultation: Government response issued

HM Treasury on 20 July 2021 published its formal response to the second stage consultation on the tax treatment of asset holding companies (AHCs) in alternative fund structures. Our response to that consultation can be found on Insights.

Alongside the formal response, the government has also made available draft legislation, covering both the forthcoming regime for AHCs and also targeted changes to the tax regime for UK real estate investment trusts (REITs). Further changes to the REIT regime may follow as an element of the wider UK funds review.

It is clear from the response and draft legislation that there are a number of points that will still need to be worked through in consultation with stakeholders, but the key highlights of the new proposals are as follows:

• The government is minded to introduce a new standalone UK tax regime for AHCs, to be implemented from tax year 2022/23.
• The regime will set out certain “clear and effective” qualifying criteria. To be within the regime, a UK resident company must meet a set of conditions and elect for the regime to apply, at which point it will become a qualifying asset holding company (QAHC).
• The intention is that QAHCs will be available to a wide range of investors, including diversely owned, eligible funds with regulated managers together with certain institutional investors, with relevant conditions borrowing from similar concepts elsewhere in the tax legislation. Those “good” investors are referred to as category A investors.
• The expectation is that category A investors should have a minimum 70% holding in a QAHC. This looks like it will be traced through intermediate holding vehicles and structures, and the government acknowledges that the rules will need to deal with the differing types of funding that may be used and with the implications of carried interest arrangements.
• The QAHC should have a focus on investment not trading activity, and the government may consider including a test around the purpose for which the QAHC has been established, ie “making, holding, managing and disposing of investments with a view to generating returns for eligible investors”.
• Not all activity of a QAHC will benefit from the regime. In particular, direct or indirect investments in UK real estate or intangibles will not be included (but overseas real estate and related intangibles will be excluded from charge), as will returns from trading activity. The latter element is a point where the government acknowledges the need for greater certainty than provided by current case law.
• The government is considering a minimum capital requirement (which could include debt funding) for QAHCs, in the region of £50m to £100m. It is not immediately clear why this should be necessary.
• Listed companies and REITs will not be eligible for the QAHC regime.
• The UK tax regime for QAHCs will be based on existing corporation tax rules, but with amendments to enable most income and gains to be returned to investors with little or no tax paid by the QAHC. This will include changes to the current distribution rules dealing with profit participating loans and results-dependent debt, with these rules being switched off in relation to the qualifying activities of QAHCs. Hedging activities by the QAHC will also be addressed.
• Although the government doesn’t proposed a broad relaxation of the rules for withholding tax from interest payments, the government proposes to remove the requirement to withhold income tax in relation to payments made in respect of securities held by investors in a QAHC.
• Chargeable gains on most assets held by a QAHC (including shares, interests in shares and overseas real estate) will be exempted and losses will not be allowable. However, the government will not be adopting a broader exemption for all chargeable gains realised by a QAHC.
• Matters such as the ability of QAHCs to be part of a wider tax group and the application of the transfer pricing and hybrids rules to QAHCs will be considered further. The government has confirmed, however, that the UK CFC rules will apply to QAHCs.
• The government will also address the position of UK investors in QAHCs, in particular regarding gains passed by the QAHC to investors, although the indication here is that not all proposals from stakeholders have been adopted.
• Transactions in interests in QAHCs will remain within the scope of UK stamp taxes, although repurchases of shares by QAHCs will be exempt, subject to an anti-avoidance rule.

On REITs, the proposals address more limited, but nonetheless beneficial, changes. In particular, the listing requirement will be relaxed where the REIT is wholly or almost wholly owned by institutional investors (with an adjustment to the definition of institutional investor in the context of CIS limited partnerships), the holder of excessive rights rule disapplied where the investor to whom the PID is paid is entitled to gross payment and the application of the balance of business test relaxed to deal with particular issues that can arise. On the close company institutional investor let-out, wider changes will be deferred as part of the UK funds review output, but HMRC does proposed to adopt a change to ease the application of the foreign REIT equivalent limb of the definition, which has caused challenges in practice.

In terms of next steps, the government intends to create a “small but diverse” working group to deal with the design and delivery of its objectives. We will continue to feed into government on the proposed changes, and other areas that should be addressed on the broader UK asset management tax regime, and would be happy to discuss these points further and to hear your feedback.