A Great British Welcome to Asset Holding Companies? – an update on the new tax regime
The government is keen to encourage funds to be set up in the UK, rather than, for example, Luxembourg. With this aim in mind, HM Treasury has been consulting with the British Property Federation (the BPF) and other relevant organisations to devise a regime that will be attractive to private equity funds, real estate funds and debt funds, so encouraging them to either set up in the UK or move existing funds to the UK.
We reported over the Summer that limited draft legislation to implement a new asset holding companies regime had been published (see our article here) with more to follow. Much more detailed legislation has now been included in the Finance Bill 2021-22. It is intended that the revised legislation and guidance 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 or by specific types of institutional investors. In such cases, the aim of the regime is that investors in overseas property, certain shares and interests in unit trusts 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, shares and intermediate holding companies, 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, so that profit participating loans can be put in place within the structure
- 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
- 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
- certain amounts paid to qualifying remittance basis users will be treated as non-UK source, reflecting the underlying mix of UK and overseas income and gains.
The current draft legislation now deals with the rules for entry into, and exit out of, the regime. In particular, assets will be treated as having been disposed of and re-acquired at market value on entry into the regime. This could give rise to tax liabilities although relief may be available under the substantial shareholding exemption provisions. In addition, the entry charge does not apply, subject to time limits, to non-resident companies which migrate to the UK specifically to join the regime.
HM Treasury has reacted positively to representations put to them by the BPF and others and have taken many points into account in the draft legislation. The introduction of the QAHCs regime and changes already being made (and proposed) to the REITs rules should make the UK a much more attractive base for the establishment of funds.
Heather is a Partner in our Corporate team.
This note reflects our opinion and views as of 24 November 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.