Taxation of asset holding companies in alternative fund structures
Published 20 July 2021
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Who is likely to be affected
Asset holding companies (AHCs) used in a range of collective 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 managed by regulated managers, or certain institutional investors and exist to facilitate the flow of capital, income and gains between investors and underlying investments.
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
- allowing deductions for certain interest payments that would usually be disallowed as distributions
- 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
- disapplying the obligation to deduct a sum representing Income Tax at the basic rate on payments of interest, where those payments are made to investors in the QAHC
- allowing premiums paid, when a QAHC repurchases its share capital from an individual, to be treated as capital rather than income distributions where, broadly, these derive from capital rather than income from underlying investments
- exempting repurchases by a QAHC of share and loan capital which it previously issued from Stamp Duty and Stamp Duty Reserve Tax (SDRT)
The regime must also include provisions to guard against potential for abuse or avoidance.
Policy objective
The measure forms part of a wider review of the UK funds regime to consider reforms which hold the potential to 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 investment arrangements that involve the pooling of investor funds with professional investment managers. The regime is not intended to affect the taxation of profits from trading activities, UK property or intangibles.
Background to the measure
At Spring 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 Spring 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.
This measure introduces that regime.
Detailed proposal
Operative date
This measure will have effect for the purposes of Corporation Tax, Stamp Duty and Stamp Duty Reserve Tax from 1 April 2022 and for Income Tax and Capital Gains Tax purposes from 6 April 2022.
Current law
This is new legislation to introduce a tax regime for QAHCs. The main areas of current law that will be affected by the proposed legislation published on 20 July 2021 are the:
- obligation at section 874 Income Tax Act 2007 to deduct a sum representing Income Tax at the basic rate on certain payments of interest
- charge to tax under chapter 3 of part 4 of Corporation Tax Act 2009 as it applies to overseas property profits
- late paid interest rules at part 5 of Corporation Tax Act 2009 (section 373(1))
- exclusion of distributions from being taken into account for the purposes of part 5 of Corporation Tax Act 2009 (section 465)
Proposed revisions
A draft of some of the proposed primary legislation in respect of this measure is published alongside this document. Not all of the required provisions are included in the draft. New provisions will give effect to each of the elements of the regime set out above and specify rules for entry and exit from the regime, including for appropriate treatment of a QAHC’s assets.
There will also be amendments to other parts of tax legislation to ensure that existing tax rules operate as intended with respect to QAHCs and other companies within a group of which a QAHC is a member.
Summary of impacts
Exchequer impact (£million)
| 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 |
|---|---|---|---|---|---|
| Empty | Empty | Empty | Empty | Empty | Empty |
The final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out at the next fiscal event.
Economic impact
This measure is not expected to have any significant economic impacts.
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 which has elected into the regime may benefit as 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 (£million) (HMRC or other)
This change will result in operational impacts for HMRC that are estimated to cost in the region of £6.8 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 and will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, contact the Financial Services Policy Team by email: financialservicesbai@hmrc.gov.uk.