As set out below, HM Treasury has published draft legislation for some, but not all of the proposals, and additional draft legislation is therefore expected.
The draft legislation published for inclusion in the Finance Bill 2022 contains some of the core elements of the new regime. As mentioned above, the new regime is intended to apply from 1 April 2022 (for corporation tax, stamp duty and SDRT purposes) and 6 April 2022 (for income tax and capital gains tax purposes).
Tax rules applicable to the QAHC
Draft Legislation has been published for the following:
- Capital gains tax (CGT) exemption : under the new rules, there will be a sweeping exemption from CGT on sales of shares and overseas real estate (as opposed to UK real estate – see below). Shares here include shares in both UK and non-UK companies, and include fixed rate preference shares, and equity like interests in a company with no share capital. Where a QAHC holds an interest in a tax transparent entity that sells shares or overseas real estate, the QAHC is similarly exempt on the gain.
- Non-UK property business (income) exemption : income profits (e.g. rental profits) from an overseas property business will be exempt from UK tax provided that the income profits are taxed in an overseas jurisdiction. In addition, the QAHC will be exempt from profits that arise from loans and derivative contracts held for the purpose of the QAHC’s overseas property business.
- Withholding tax (WHT) exemption : WHT on interest paid by QAHCs to investors will now be exempt from UK WHT. Under existing rules, the UK generally does not impose WHT on dividend payments (other than e.g. REITs). Accordingly, a QAHC will be exempt from WHT on both interest and dividends to the Fund investors. Third party debt will remain subject to UK WHT on interest under normal rules, subject to the usual exemptions (e.g. UK lender, Quoted Eurobond exemption or Double Tax Treaty relief).
- Corporation tax on income, increased tax deductions : current rules can deny tax deductions with respect to payments made on results dependent debt (e.g. profit participating loans), which if applicable, causes increased tax leakage in the UK company. Under the new rules, the results dependent interest restriction will be switched off for QAHCs, thereby giving a tax deduction for interest expenses on such profit participating debt. Similarly, late paid interest rules will be adjusted to ensure that the QAHC achieves tax on its commercial margin. The government has said that it is considering revoking for QAHCs the existing transfer pricing exemption for small and medium sized enterprises, but no draft legislation has yet been published for this.
Please note that income and gains on UK real estate (including gains made by non-UK residents on sales of UK “real estate rich” companies, i.e. that derive, directly or indirectly, 75% or more of its value from UK real estate) will not be able to benefit from the QAHC regime, and will be subject to UK tax in the normal way. There are special rules to allow QAHCs to hold UK real estate (and other non-qualifying activities), but their profits will be subject to UK tax in the normal way, and will not benefit from the special regime for the holding of shares and non-UK real estate set out above.
Draft legislation has not yet been drafted for the following proposals, but these are anticipated:
- 5. Anti-hybrid / hybrid mismatch rules : the government “anticipates that it will be necessary” to switch off the rules relating to hybrid financial instruments from applying to profit participating instruments. The UK government is considering whether there needs to be changes to any of the other anti-hybrid rules. 6. Share buybacks :
- existing rules that treat the premium on a share buyback by UK companies as a distribution and not as a return of capital, will be switched off (under current rules, share buybacks by UK companies are generally treated as distributions, as compared to share buybacks by overseas companies which are usually treated as a return of capital). This is particularly helpful for individual investors and UK carried interest holders that are generally subject to lower rates of tax on capital gains as compared to income, from the Fund, and
- repurchase of shares and loan capital issued by the QAHC will be exempt from UK stamp duty / SDRT.