Policy paper

New tax regime for asset holding companies (AHCs)

Published 27 October 2021

Who is likely to be affected

Asset holding companies (AHCs) that meet certain criteria and are used in a range of collective and institutional investment structures to hold investment assets, and the investment funds, institutions, individuals and other entities that invest in those structures.

General description of the measure

The measure introduces a regime for the taxation of qualifying asset holding companies (QAHCs) and certain payments that QAHCs may make. A QAHC must be at least 70% owned by diversely-owned funds, or certain institutional investors, and mainly carry out investment activity with no more than insubstantial ancillary trading.

Policy objective

The measure forms part of a wider review of the UK funds regime to consider reforms which hold the potential to have positive outcomes for the financial sector and enhance the UK’s competitiveness as a location for asset management and for investment funds.

The aim is 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 invested in the underlying assets and the intermediate holding companies pay no more tax than is proportionate to the activities they perform.

The regime is intended to only be available to prescribed investment arrangements involving diversified investment funds, charities, long-term insurance business, sovereign immune entities and certain pension schemes and public bodies. The regime is not intended to affect the taxation of profits from trading activities, UK land or intangibles.

Background to the measure

At Budget 2020, the government announced that it would carry out a review of the UK funds regime, covering tax and relevant areas of regulation. The review started with a consultation on the tax treatment of AHCs in alternative fund structures, also published at Budget 2020.

The government responded to that consultation in December 2020, launching a second-stage consultation on detailed design features of a new regime for AHCs. The government’s response to that consultation was published on 20 July 2021, alongside draft legislation. This measure introduces the new AHC regime.

Detailed proposal

Operative date

This measure will take effect from 1 April 2022.

Current law

Existing provisions modified by this measure are in the following Acts: Finance Act 1986; Taxation of Chargeable Gains Act 1992; Finance Act 1999; Income Tax Act 2007; Corporation Tax Act 2009; Corporation Tax Act 2010; Taxation (International and Other Provisions) Act 2010.

Proposed revisions

Legislation will be introduced in Finance Bill 2021-22 to establish a new tax regime for QAHCs and some of the payments they make. Taxation in the new regime is based on existing tax rules, but with some modifications set out in a schedule to the Finance Bill.

The regime for QAHCs will include:

• exempting gains on disposals of certain shares and overseas property by QAHCs
• exempting profits of an overseas property business of a QAHC, where those profits are subject to tax in an overseas jurisdiction, and also exempting the associated profits that arise from loan relationships and derivative contracts
• allowing deductions for certain interest payments that would usually be disallowed as distributions (along with necessary consequential changes to the hybrids rules)
• switching off the late paid interest rules so that, in certain situations, interest payments are relieved in the QAHC on the accruals basis rather than the paid basis
• switching off the deeply discounted securities rules for corporates so that, in certain situations, the discount arising on any such security issued by the QAHC is relieved on the accruals basis rather than the paid basis
• disapplying the obligation to deduct a sum representing Income Tax at the basic rate on payments of interest
• switching off the transfer pricing exemption for small and medium-sized enterprises and adjusting the participation condition to ensure the transfer pricing rules apply appropriately in relation to a QAHC
• allowing premiums paid, when a QAHC repurchases its share capital from an individual, to be treated as capital rather than income distributions
• allowing certain amounts paid to qualifying remittance basis users by a QAHC to be treated as non-UK source, reflecting the underlying mix of UK and overseas income and gains
• exempting repurchases by a QAHC of share and loan capital which it previously issued from Stamp Duty and Stamp Duty Reserve Tax (SDRT)
• entry and exit provisions, including the rebasing of certain assets and the creation of a new accounting period when a company enters and exits the regime

The regime will also include administrative provisions and provisions to guard against potential for abuse or avoidance.

Summary of impacts

Exchequer impact (£m)

2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027
nil	nil	-5	-10	-15	-20

These figures are set out in table 5.1 of Autumn Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2021.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.

Impact on individuals, households and families

The measure is expected to have an impact on individuals who invest in structures that use QAHCs.

Individuals investing directly in a QAHC may benefit. For instance, they may be able to receive returns from that QAHC that are taxed as Capital Gains.

Customer experience is expected to remain broadly the same as this measure does not significantly alter how individuals interact with HMRC.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It not anticipated that there will be impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on an estimated 1,100 businesses who own companies eligible to use the regime. One-off costs include familiarisation with the changes. Continuing costs will include providing HMRC with more information. Customer experience is expected to remain broadly the same as the regime is elective and the additional admin burden is not considered to be overly complex or burdensome.

This measure is not expected to impact civil society organisations.

Operational impact (£m) (HMRC or other)

This change will result in operational impacts for HMRC that are estimated to cost in the region of £10 million.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns submitted and information required to be returned to HMRC, and will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact the Financial Services Policy Team. Email: financialservicesbai@hmrc.gov.uk.