UK proposes new tax regime for fund asset holding companies

The broad aim of the proposed new regime is to ensure that 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 government issued a second consultation on the proposals in December and has now set out the plans for reform in draft legislation, a policy paper and a consultation response document.

“The proposal for a new standalone elective regime for asset holding companies is welcome, although there are still quite a few details left for the UK government to iron out with key stakeholders,” said Hatice Ismail, a funds tax expert at Pinsent Masons, the law firm behind Out-Law. “The success of the qualifying asset holding companies (QAHC) regime and the ability of QAHCs to compete with overseas alternatives could potentially still be held back by the general complexity of the UK tax code, with many existing anti-avoidance rules in particular continuing to apply to QAHCs with modifications.”

QAHCs are UK resident companies which are at least 70% owned by diversely owned funds managed by regulated managers, or certain institutional investors. Examples of QAHCs commonly include asset holding companies owned by pension funds, life assurance companies and real estate investment trusts (REITs).

To qualify as a QAHC, a company must be investing its funds with the aim of spreading investment risk and giving investors in the company the benefit of the results of the management of its funds. Any other activities must not be carried on to any substantial extent. The new regime is not intended to affect the taxation of profits from trading activities, UK property or intangibles.

Core features of the new QAHC regime proposed include an exemption for gains accruing to a QAHC on disposals of overseas land and an exemption for income profits of a QAHC’s overseas property business where those profits are subject to tax overseas.

An exemption for gains from shares other than those in property rich companies, deriving at least 75% of their value from UK land, is also planned.

“It is important to note that QAHCs will still be subject to UK corporation tax on UK property income and gains,” said Richard Croker, a property funds tax expert at Pinsent Masons. “Capital gains on overseas land will be exempt, regardless of whether they are taxed overseas, whereas the exemption for tax on income is only available to the extent that the income is taxed overseas.”

The proposed QAHC regime would 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 would not apply in certain situations so that interest payments are relieved for a QAHC on an accruals rather than paid basis.

“Switching off the distribution rules will allow premiums paid when a QAHC repurchases its share capital from an individual investor to be treated as capital rather than income where, broadly, these derive from capital gains realised by the QAHC on the underlying investments,” Croker said.

“There will be no withholding tax on income distributions to investors in QAHC securities, so there will be no need to take action to bring them within the quoted eurobond exemption,” he said.

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.

“The absence of a stamp duty or SDRT exemption for transfers of the shares of the QAHC itself may make non-UK incorporated companies more attractive as QAHCs – although to qualify they need to be UK tax resident,” Croker said.

There would 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, Hatice Ismail said, so that, for example, losses from qualifying activities cannot be set off against profits of non-qualifying activities. 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, she said.

The government has not decided whether to introduce changes to make UK asset holding companies that hold foreign assets more attractive to UK tax resident non-domiciled individuals, according to the consultation response document. Some respondents had suggested that foreign assets held in a UK asset holding company should be treated as non-UK situated assets for inheritance tax purposes.

There would be an entry charge into the QAHC regime by way of a deemed disposal and reacquisition of assets relating to qualifying activities only, to prevent a loss of tax, subject to existing exemptions and reliefs. Entry into and exit from the regime would trigger the end of an existing accounting period and the start of a new one.

The government is still considering the treatment of losses within a QAHC but one possibility is that pre-entry losses accrued on the qualifying activities will be unavailable against profits arising within the QAHC qualifying ring-fence. Unused losses generated from qualifying activities while in the AHC regime would be lost upon exit

The changes are intended to have effect from 1 April 2022 for the purposes of corporation tax, stamp duty and SDRT, and from 6 April 2022 for income tax and capital gains tax purposes.