The UK government has moved a step closer to introducing a new and advantaged tax regime for UK asset-holding companies (“AHCs”) for investment funds.  On July 20, 2021 it published a policy paper and draft legislation providing for the implementation of certain features of this proposed new regime.

The proposals are part of a drive to encourage fund managers to increase their use of UK AHCs in their fund structures and enhance the UK’s position as an asset-holding jurisdiction of choice for private investment funds. In order to achieve this the UK government’s proposal is aimed at removing obstacles for UK AHCs that are not present in jurisdictions where AHCs are commonly located and to ensure that little or no tax leakage arises at the level of a UK AHC such that the tax paid by a UK AHC is proportionate to the activity it undertakes.

The policy paper and draft legislation can be found here.

The regime

Under the regime, AHCs which elect to benefit from the regime and which are qualifying asset holding companies (“QAHCs”) (as to which, see below “Qualifying Asset Holding Companies”) will be taxed in accordance with existing UK corporation tax rules, subject to the following beneficial modifications:

  1. gains on disposals of certain shares and overseas property by QAHCs will not be chargeable gains (i.e. they will be tax exempt);
  2. profits of an overseas property business of a QAHC, where those profits are subject to tax in an overseas jurisdiction, will be exempt from UK corporation tax;  
  3. QAHCs will be able to take deductions for certain interest payments (for example, in relation to profit participating loans and results-dependent debt) that would otherwise be disallowed as non-deductible distributions;
  4. the late-paid interest rules will not apply so that, in certain situations, interest payments are relieved in the QAHC on the accruals basis rather than the paid basis;
  5. QAHCs will not be obliged to withhold UK tax in relation to payments of interest made in respect of securities held by investors;
  6. when a QAHC repurchases its share capital, premiums paid will be treated as capital rather than income distributions where, broadly, these derive from capital rather than income generated from underlying investments;  and
  7. repurchases by a QAHC of share and loan capital will be exempt from UK stamp duty and stamp duty reserve tax (“SDRT”).  

The latter two modifications will be important with respect to carried interest and team commit planning. This is because the current rules would lead to any premium paid on a repurchase of share capital being taxed as income for UK individual carry or co-investment holders and, therefore, taxed at a higher rate.  

The policy paper published also provides that the regime must include provisions to guard against the potential for abuse or avoidance.

The draft legislation covers only proposals (a) to (e) inclusive above. It is not yet known when draft legislation relating to the treatment of premiums paid on a repurchase of capital and to stamp duty and SDRT on a repurchase of capital will be published and we await further detail to be provided in relation to these features of the proposed regime.

The UK government has also proposed certain changes to the UK REIT regime (some of which will run to the same timetable as the AHC legislation). These proposals are not covered in this briefing.

Qualifying Asset Holding Companies

The new regime will be elective and so AHCs must choose to benefit from the regime if they wish to do so.  However, electing AHCs must satisfy certain qualifying conditions set out in the draft legislation to benefit.  If these conditions are satisfied, the AHCs will be QAHCs. 

QAHCs must satisfy (inter alia) the “ownership condition” and the “activity condition”.

Ownership condition

The ownership condition is that the QAHC must be at least 70% owned by “category A investors”.  The specific definition of category A investors is complex.  Very broadly, it includes other QAHCs, diversely owned[1] funds which are managed by regulated managers (referred to as “qualifying funds”), certain institutional investors (including, for example, certain pension funds, long-term life assurance business entities, and entities not liable to UK tax due to sovereign immunity) and UK real estate investment trusts (‘REITs’).  It is worth noting that the UK government has indicated that its intention is to introduce a requirement that fund managers of qualifying funds are independent from those investors.  The meaning of “independence” in this context is not yet defined and the independence requirement not yet included in the draft legislation.

Activity condition

The activity condition is met if the main activity of the AHC is investing funds with the aim of spreading investment risk and giving investors the benefit of the results of the management of its funds and provided that any other activities of the company are not carried on to a substantial extent.  In other words, all or substantially all of the AHC’s activity must be investment activity and not, for example, trading activity.

Listed companies and UK REITs are expressly excluded from the definition of a QAHC (although, as above, a UK REIT is a category A investor for the purposes of the ownership condition as currently drafted).

Background to the introduction of the new UK AHC regime

The context of the proposals is the UK government’s wider review of the UK funds regime. The UK government has been assessing both tax and relevant areas of regulation with a view to further enhancing the UK’s attractiveness as a key jurisdiction for asset managers.

Specifically, at the 2020 Budget the UK government launched the first consultation on potential reforms to tax treatment of AHCs. The objective was to ascertain whether targeted reforms could help make the UK a more competitive location for locating AHCs.

AHCs are an important part of alternative fund investment structures. Depending on the specific strategy and asset class in question, it is not uncommon for investment funds to use a master holding company owned and financed by the fund, with its investments held through a chain of subsidiary holding companies and/or other entities.  Desired effects of these tiered investment-holding structures include structural subordination of various types of debt finance and insulation of the fund from various liabilities and risks associated with directly holding the investments to a greater extent than would otherwise be possible if the assets were held directly by the fund.  The tiered investment-holding structure may also help to compartmentalise investment risk, in the sense that investments are insulated from risks associated with other investments held by different AHCs within the wider structure.  AHCs may also be used as blockers to prevent dry tax charges arising to fund investors.

The specific features of the tiered investment-holding structures, such as location of AHCs used, are driven by multiple factors, including location of target / target group, external finance, level of tax leakage, overall investment structure and familiarity on the fund manager’s part with the relevant jurisdiction and/or a particular holding structure.

Concerned that, despite the general attractiveness of the UK corporation tax system for holding company structures, there remain barriers to the establishment of these intermediate fund entities in the UK, the UK government acknowledged in its initial consultation that “these barriers, which do not exist in some other jurisdictions, are leading these entities to be located outside of the UK”.  The types of barriers perceived to exist include the imposition of UK withholding tax on interest paid by AHCs, with a listing of the debt often undertaken to access an exemption, and a participation exemption (the ‘substantial shareholding exemption’) in the UK that has historically been narrower than equivalents in other jurisdictions.  UK AHCs can also be more difficult to structure to ensure that returns are taxed as capital for the investment management team (even where the returns to the AHC are capital in nature).  These perceived issues have led to a number of UK fund managers establishing holding platforms outside of the UK, despite operational challenges and expenses associated with operating in a different jurisdiction.

The UK government has therefore been reviewing the position to explore the attractiveness of the UK as a location for the intermediate entities through which alternative funds hold their assets.

Following the responses to this initial consultation, which generally confirmed the UK government’s view that UK tax reform would bolster efforts to enhance the UK’s role as an asset management centre, a second consultation was undertaken in December 2020 focusing on the detailed design features of a new tax regime for AHCs.

On July 20, 2021 the UK government published its response to the consultations and announced that it intends to enact legislation to implement the new AHC regime for investment funds in the next Finance Bill, taking effect from April 2022.


Although there is more work to be done in developing the proposed QAHC regime and more detail is awaited, this is certainly a positive step towards increasing the use of UK AHCs by investment funds.

The QAHC regime should help reduce tax leakage at the AHC level of fund structures, increasing returns to the fund and, in turn, its investors.  For UK fund managers, this would also allow for streamlining of the location of the management of the fund with the location of the operation of the AHCs, in turn reducing costs of administration of the AHCs.

An important point to note is that not all investment activity will qualify for favourable tax treatment under the regime, as currently proposed.  Significantly, although QAHCs will be permitted to (either directly or indirectly) hold UK real estate, UK real estate income and gains on disposals will be subject to UK corporation tax in the usual way.  In other words, whilst holding UK real estate investments will not prevent an AHC from being a QAHC, rental income will be subject to UK corporation tax, gains on disposals of UK real estate will be chargeable (unless the AHC has, for example, made an exemption election under the UK’s non-resident capital gains tax rules introduced in 2019) and the usual distributions and late-paid interest rules will apply in relation to the UK real estate investments.  By contrast and as explained above, profits of an overseas property business of a QAHC will be exempted from corporation tax (to the extent those same profits are subject to tax in an overseas jurisdiction).[2]

It also appears from the proposed rules that where fund executives hold their carried interest or co-investment interest through the qualifying fund which invests in the relevant AHC, their entitlements in the fund will generally not be relevant to the calculation of whether the fund is a category A investor for the purposes of the ownership condition.  By contrast, where fund executives hold their interests directly in the AHC (or through a team vehicle that holds interests directly in the AHC), they will not be category A investors for the purposes of the ownership condition.  In short, at this stage and subject to case by case analysis, under the proposed new rules it would appear that it would be preferable for fund executives to hold their interests through the fund if looking to elect into the new QAHC regime once introduced.

Next steps

While we wait for Parliamentary procedure to run its course to the next Finance Bill, the UK government has stated that it will establish a working group to discuss a number of points relating to the proposed new regime which are outstanding. These include:

  • the draft legislation for proposals (f) (premiums on a repurchase of capital) and (g) (stamp/SDRT on a repurchase of capital) above;
  • whether to impose a requirement for a minimum amount of capital raised for investment in the region of £50 million to £100 million as a further qualifying condition for QAHC status;
  • certain issues relating to the taxation of derivatives;
  • in relation to the proposed QAHC gains exemption, the possible introduction of targeted rules to address certain risks (eg. holding non-qualifying chargeable assets in companies to take advantage of exempt share disposals);
  • modifications to the UK hybrid mismatches rules to ensure that the QAHC regime and these rules interact appropriately;
  • the treatment of losses within a QAHC;
  • clarifying the application of the employment related securities rules to directors of QAHCs (we note in particular the question of whether carried interest is deemed to be an employment related security by virtue of directorship alone, on which clarification would be welcomed);
  • whether the remittance basis should be available for foreign assets even when held through a UK AHC;
  • rules dealing with temporary breaches of the QAHC eligibility criteria; and
  • the method by which an AHC meeting the eligibility criteria will notify HM Revenue & Customs (“HMRC”) of the election to be taxed under the QAHC regime and how HMRC may monitor the continuing status of QAHCs.

It will be interesting to see how the UK government’s policy on these and other points develops as the draft legislation is considered further.  These uncertainties aside, the proposed reforms represent a welcome step forward in the evolution of fund taxation policy in the UK. 

[1] As currently drafted, the diversity of ownership conditions are based on the genuine diversity of ownership rules in the Offshore Funds (Tax) Regulations 2009 SI 2009/3001 and, in relation to companies the close company rules in Chapter 2, Part 10 of the Corporation Tax Act 2010 (subject to Schedule 5AAA to the Taxation of Chargeable Gains Act 1992). 

[2] The mechanism through which the draft legislation achieves this is as follows. Part 2 of the draft legislation (which deals with items (c) (distributions) and (d) (late-paid interest rules) above) makes use of a concept called the “QAHC ring fence business”; the favourable treatment is only applicable in respect of distributions and debits relating to the QAHC ring fence business. The QAHC ring fence business is defined in the draft legislation as the business of a QAHC of carrying out its investment activity in relation to overseas land, certain shares, creditor relationships and certain derivatives.  In other words, distributions to investors and interest payments relating to activities falling outside of the scope of the QAHC’s ring fence business will not benefit from the favourable treatment.  Secondly, the specific exemptions relating to overseas property income and disposals of overseas property and certain shares simply do not include certain investments, such as real estate, within their scope.