Who are the rules most relevant for?
The regime seeks to capture the vast majority of the funds sector and will specifically be relevant for private equity, infrastructure, credit and real estate assets held by alternative investment funds.
The rules will also apply to sovereign wealth funds, domestic and international pension schemes, UK and overseas real estate investment trusts (REITs) and/or long-term insurance funds.
When will it take effect?
The rules will take effect from 1 April 2022. The regime is elective, and a decision to enter into the regime will need to be made and documented by qualifying companies in order for it to be valid.
What are the benefits of being in the regime?
If a UK tax resident company meets the conditions to be a qualifying AHC (QAHC) and has elected to be so, it will be able to benefit from a variety of tax exemptions and simplifications. Together, these provisions aim to ensure there should be no incremental taxation on yield earned beyond the taxation in the investee territory and the final taxation borne by investors.
In particular, the following changes have been introduced:
- A simplified gains exemption that applies without any requirements in relation to the trading status of the underlying investment, holding period or ownership percentage.
- An ability to return funds to investors in capital form for UK tax purposes (and retain their underlying source) and without incurring stamp duty.
- A complete exemption from UK interest withholding tax on both third party and shareholder debt.
These changes are all alongside the UK’s existing territorial tax system, featuring no dividend withholding tax under domestic law. The UK also offers a broad distribution exemption, the world’s most comprehensive Double Tax Treaty network and one of the largest networks of bilateral investment treaties.
Outside of tax, the regime also allows for taxpayers to evaluate whether onshoring their holding activities may reduce operating costs. It also provides operational simplification, given the existing operations that many already have in the UK, and the availability of talent in London and the wider UK market.
What key conditions need to be met to access the regime?
While the conditions to be met are detailed, a high-level summary is set out below.
A UK tax resident company is a QAHC if it meets the following criteria (and has elected to be part of the regime):
- It is owned and controlled at least 70% by eligible investors. An eligible investor is, broadly, a widely-held (or non-close) collective investment scheme or alternative investment fund, or a long-term insurance business, Sovereign Wealth Fund, UK or overseas REIT, UK-property rich carried interest vehicle (CIV), UK or non-UK pension scheme or charity. Provisions in the rules allow for intermediate companies or other transparent vehicles to exist between the qualifying fund/investors and the QAHC, if certain conditions are met.
- It meets the activity condition. This requires that its main activity is carrying on an investment business and any other activities it carries on are ancillary to that main business and are not carried on to a substantial extent.
- It meets the investment strategy condition. This requires that the company’s investment strategy does not involve the acquisition of listed equity securities (outside of a public-to-private transaction).
In addition, the UK AHC must not be a UK REIT or listed or traded on a recognised stock exchange or similar.
What are the key takeaways for businesses to consider now?
The introduction of the UK AHC regime is a welcome simplification to existing tax rules that will accelerate a trend that was already in motion to use UK holding company structures where possible.
EY have previously assisted with the first UK holding company migration projects in both the institutional and private equity fund sectors prior to these rules being introduced, and has been a core part of the working group collaborating with the UK Government on the development of these new rules. Based on these experiences we recommend:
- Businesses evaluate whether existing and new funds are eligible for the regime and satisfy the entry criteria based on historic deal precedents. Although we expect most market participants should qualify, the diversity of the investment fund sector means that this is an important point of diligence.
- For those considering the use of a UK AHC for existing investments
- Businesses should first critically evaluate the level of inherent risk in existing structures given recent case law and the potential impact on internal rate of return (IRR) from foreseeable source-country tax controversy.
- Assess whether a transition to a UK structure impacts that evaluation.
- Evaluate whether this transition may incur a dry-tax charge, including the application of the AHC entry charge.
- For those launching new funds, we recommend they evaluate whether this reform creates an opportunity to establish a UK holding platform and evaluate the relative costs and benefits against their historic approach.
- In relation to both existing and new funds and investments, evaluate whether, given existing operational activity in the UK, a master holding company structure (rather than deal-by-deal special purpose vehicle) offers the best approach to demonstrate to tax authorities the existing operational substance in the UK.
Some funds will migrate existing holding platforms into the UK, some will continue to use non-UK platforms, and some will use the UK for new funds and investments but leave existing funds and investments ‘as is’. In most cases, it will be valuable to analyse the costs vs. benefits of these broad approaches.
