Favourable new tax rules for asset holding companies (AHCs) are due to be introduced in the UK in 2022. Here, we provide an overview of the proposed new rules.
While the UK is the largest market for fund management outside of the US, the UK’s relatively onerous tax rules mean it is preferable for asset holding companies to be established in more favourable tax jurisdictions. The aim of the reform, therefore, is to remove tax barriers facing companies within UK fund structures and ensure that intermediate holding companies are taxed more neutrally.
The changes form part of the Government’s wider review of the tax regime surrounding investments funds that are aimed at increasing the UK’s competitiveness as a location for asset management and investment funds.
The review was first announced at the spring 2020 Budget. Following two consultations with the fund management sector, the Government decided to introduce a dedicated but optional tax regime for AHCs, rather than enact wider tax changes.
An Overview Of The Measures
The new regime attempts to recognise circumstances where intermediate holding companies are used to facilitate the flow of capital, income, and gains between investors and underlying investments, so that investors are taxed broadly as if they had invested in the underlying assets, and the intermediate holding companies pay no more tax than is proportionate to the activities they perform.
The special elective tax regime is designed for “qualifying asset holding companies” (QAHCs) and certain payments that QAHCs may make.
To qualify, an AHC must be at least 70 percent owned by widely held funds managed by regulated managers, or certain institutional investors, and exist to facilitate the flow of capital, income, and gains between investors and underlying investments.
Notable tax changes include exempting gains on disposals of certain shares and overseas property by QAHCs and exempting profits of an overseas property business of a QAHC where those profits are subject to tax in an overseas jurisdiction.
The new regime also allows deductions for certain interest payments that would usually be disallowed as distributions, and the “switching off” of the late paid interest rules to improve the way interest payments are relieved in the QAHC in certain situations.
A further change includes removing the obligation to deduct a sum representing income tax at the 20 percent basic rate on payments of interest, where those payments are made to investors in the QAHC.
Another aspect of the new regime allows premiums paid when a QAHC repurchases its share capital from an individual to be treated as capital rather than income distributions where these derive from capital rather than income from underlying investments.
Finally, the measures exempt from stamp duty and stamp duty reserve tax repurchases by a QAHC of share and loan capital that it previously issued.
These changes will affect AHCs used in a range of collective investment structures used to hold investment assets, and the investment funds, institutions, individuals and other entities that invest in those structures.
The regime may also benefit individuals investing directly in a QAHC, as returns may be taxed as capital gains.
These changes will come into effect for the purposes of corporation tax, stamp duty and stamp duty reserve tax from April 1, 2022, and for the purposes of personal income tax and capital gains tax from April 6, 2022.