- The UK is introducing a new elective tax regime for asset holding companies (AHCs) from the beginning of tax year 2022/23.
- This is a significant and positive development for the UK asset management industry.
- It is anticipated that this will enhance the attractiveness of the UK as a location for AHCs. In turn, it is hoped that this will attract increased activity and jobs whilst boosting the UK’s reputation as a funds domicile.
- In addition, reforms are being made at the same time to the real estate investment trust (REIT) regime.
- This insight briefing is a follow-up to our 15 December 2020 report.
What does the new regime do?
- AHCs that meet the eligibility criteria and elect for the regime to apply will benefit from a simplified tax regime.
- An AHC within the regime will pay corporation tax based on its commercial margin.
- Although an AHC may invest in UK real estate, the special regime’s advantages will not apply in respect of this asset class; it will apply though in relation to overseas real estate.
- Our expectation (as indicated previously in the consultation) is that the regime will be designed to recognise the "cardinal principle" of fund structuring which is to leave the investor in no worse position, from the perspective of tax paid on investment income and gains, than if they had invested directly in the underlying assets.
What are the eligibility criteria?
- UK resident company: The regime is open to UK resident companies that meet certain conditions on an ongoing basis.
- Investor condition: The intention is that this regime should apply to the following classes of investor:
- diversely owned, eligible funds with regulated managers (broadly speaking, collective investment schemes and alternative investment funds); and
- certain institutional investors (this category will include UK REITs).
- It is possible for investors in an AHC to fall outside these classes. However, there is an expectation that at least 70% of the investment is from these investors. Individual fund managers with direct investments in an AHC will fall outside these classes.
- AHC activities: All or substantially all of the AHC activity should be of an investment nature. However, not all investment activity will benefit from the regime. Notably, benefiting includes investment in assets such as shares, overseas real estate and loans but it does not include investment in UK real estate or UK intangibles.
- Minimum amount of capital: The UK is considering whether an AHC should be required to raise a minimum amount of capital for investment in the region of £50 million to £100 million.
- No listed company or REITs: Unsurprisingly, listed companies cannot benefit from the regime. Similarly, REITs are excluded.
How is the tax position simplified?
- The AHC will be taxed on its commercial margin as adjusted by transfer pricing.
- This requires a number of amendments to the legislation, such as turning off results-dependent debt which may restrict a tax deduction.
- A tax exemption for chargeable gains/allowable losses on disposals of investments is also proposed. One would anticipate that this will be wider than the current substantial shareholding exemption and potentially more in line with the favourable Luxembourg participation exemption (or perhaps even more advantageous).
- In addition, the regime will:
- remove the obligation to withhold a sum representing income tax in relation to payments made in respect of securities;
- introduce a ring-fencing restriction such that groups cannot abuse the AHC regime to prevent losses from AHC activities being used to offset non-AHC activities;
- not amend the UK’s controlled foreign companies rules – these will continue to apply;
- amend the UK’s hybrid and other mismatch rules to ensure that they support the policy objectives of the regime;
- not amend significantly the UK’s corporate interest restriction (or interest barrier) rules;
- make certain to rules concerning distributions to UK individual investors to ensure that gains realised by the AHC which are passed up to the investors are taxed as capital – these rules will inevitably be surrounded by anti-tax avoidance rules; and
- introduce an exemption for stamp duty and stamp duty reserve tax for the repurchase by an AHC of its own shares and loan capital.
Is the above definitive?
- This is still at an early stage and the legislation has not yet been introduced, so we should expect further change and movement in relation to this area.
- We will continue to monitor developments and track the draft legislation.
- If you would like to discuss any of these issues, please do feel free to get in touch.