A Great British Welcome to Asset Holding Companies? – an overview of the new tax regime
The government is keen to encourage funds to be set up in the UK, rather than, for example, Luxembourg and by publishing details of a new tax regime for asset holding companies in July 2021, is demonstrating that it is prepared to change the UK tax legislation to allow this to happen.
Consultations about a possible new funds regime began at the time of the Spring Budget 2020 and, following two rounds of consultations, some of the draft legislation to implement the new asset holding companies regime has now been published. It is intended that all of the revised legislation will be in place by April 2022 and that funds can join the regime from that time.
In order to fall within the new regime, qualifying asset holding companies (QAHCs) must be at least 70% owned by diversely owned funds that are managed by regulated managers or by specific types of institutional investors. In such cases, the aim of the regime is that investors in overseas property and certain shares should be treated, so far as possible, as if they held the underlying investments direct. It should be noted that the beneficial tax treatment will not, however, apply to holdings of UK property.
In order to achieve the favourable tax treatment for overseas property and shares, a number of the provisions that would normally apply within the tax legislation will be amended so far as QAHCs are concerned. In particular:
- Gains on disposals of certain shares and overseas property by QAHCs will be exempt.
- Profits of an overseas property business of a QAHC will be exempt where those profits are subject to tax in an overseas jurisdiction.
- Certain interest payments that would usually be disallowed as distributions will be deductible.
- The late paid interest rules, which can apply in some situations, will be switched off, so that interest payments will be relieved in a QAHC on an accruals basis, rather than the paid basis.
- Interest payments made by a normal company would, potentially, be subject to withholding tax, but the new regime will disapply the obligation to deduct income tax at the basic rate on payments of interest where those payments are made to investors in a QAHC.
- If a QAHC repurchases its share capital from an individual, the premium paid will be able to be treated as a capital, rather than an income, distribution, provided that, broadly, the payment derives from capital (rather than income) from the underlying investments.
- Repurchases by a QAHC of share and loan capital which it had previously issued will be exempt from stamp duty and stamp duty reserve tax.
The draft legislation which has so far been published only makes provision for some of these changes. We can therefore expect to see further draft legislation which will introduce other elements of the regime and rules for entry into and exit out of the regime over the coming months.
The intention is that the new regime will only apply where funds are managed as investments and that a QAHC will not be able to carry out other activities, including trading, to any substantial extent. To this end, there has been a limited attempt to introduce an investment test in the draft legislation but further thought needs to be given to this. It is known that HMRC are still considering how best to distinguish between investment and trading in relation to QAHCs and it is to be hoped that the current draft legislation will be expanded in due course to clarify the position.
For the time being, we must wait and see what the final rules and legislation provide and whether the government’s aim of encouraging funds to the UK will bear fruit.
This note reflects our opinion and views as of 12 August 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.
Heather is a Partner in our Corporate team.