Asset Managers Stick to London as New UK Tax Rules Take Hold

The UK’s new “asset holding company” tax regime got off to a healthy start in 2022, and US and global investment funds are likely to drive growth in the use of this new vehicle over the coming year.

The Qualifying Asset Holding Companies structure allows investment funds (as well as institutional investors such as pension funds, insurance, sovereign wealth, and charities) to hold and manage investments through an onshore vehicle in the UK with the benefit of a simple and low-cost tax treatment.

The UK has long offered tax exemptions for holding companies of trading groups, but the new QAHC regime goes much further in allowing a wide range of investment assets (including credit instruments, warrants, minority equity, and global real estate) to be managed through the UK with minimal tax drag. The UK introduced the QAHC regime to keep attracting the global asset management community to London, and there are early signs that this investment is paying off.

Around 120 QAHCs have been registered with the UK tax authority, and more are expected as fund managers raise their next rounds of investment. Initial interest in the new regime has been especially strong for credit and special situations strategies. But all asset managers with UK-based investment professionals in the UK will be weighing the opportunity to simplify their global operations back into London over time.

Setting up UK holding companies for funds being raised in 2023 may be a wise response to ongoing tax changes likely to affect the traditional holding jurisdictions—such as Luxembourg—in the coming years.

By design, a UK QAHC should be able to invest in UK and foreign (including US) securities and real assets and repatriate income and gains across a broad investment spectrum without incurring any significant UK tax cost. A QAHC also should be capable of accessing the UK’s network of tax treaties to mitigate taxes and withholding in underlying investment jurisdictions.

The diagram below illustrates the workings of a UK QAHC in simplified form.

Exempt gains: A QAHC will be exempt from UK tax on gains on disposal of a wide range of underlying securities, including shares and warrants regardless of shareholding or ownership percentage; the exemption also applies to non-UK real estate.

Exempt dividends: A QAHC will be exempt from tax on most dividends received in the same way as an ordinary UK company.

Tax treaties: A QAHC should have the same access to the UK’s network of tax treaties as an ordinary UK company to mitigate underlying tax costs and receive a greater share of gross investment proceeds. Each investment jurisdiction will need to recognize the appropriate UK connection for the QAHC, but one run by investment professionals in the UK should be able to claim treaty benefits where relevant—although certain treaties such as the one between the UK and the US may impose additional conditions.

Tax shelter for income: A QAHC will benefit from accruals-based deductions on various forms of profit-participating debt, which allows these vehicles to be funded with instruments that create effective and timely tax shelters for income-producing assets such as loans or bonds. This results in only a small margin of taxation in the UK on this sort of income.

No withholding: There will be no UK withholding on either dividends or interest payments made by a QAHC to its investors, including on the key profit-participating instruments that are used to fund the underlying investments.

Limited transfer or capital taxes: A UK QAHC will be exempt from many UK transfer or capital taxes that might otherwise apply, and investors are unlikely to bear these as a real cost.

UK Investment Team. The use of a UK QAHC should also allow any investment professionals based in the UK to participate in returns (through co-investment or performance returns) on a streamlined basis for UK tax purposes. The net result of a correctly structured QAHC should be that some UK tax is levied on marginal profits realized on income-producing assets—determined under transfer principles, but in most cases expected to result in a sub-1% margin taxed at the 25% UK corporation tax rate starting in April —and that investment proceeds can otherwise be received in the UK and passed back to investors flexibly and without undue tax friction.

To elect a company into the QAHC tax regime, a few objective conditions will need be satisfied.

UK tax residence: A QAHC will need to be a UK tax resident, although it could still be set up under non-UK corporate law if preferred.

Ownership: At least 70% of the QAHC’s investors need to be of a certain type. This includes pension funds, insurance companies, sovereign wealth funds, and charities but also allows most standard investment funds to qualify on their own merits without needing to trace through to their ultimate investors. Funds looking to rely on this route to qualification should, however, pay attention to their marketing strategy and materials early on.

Investment business: A QAHC must only carry on an investment business, and other activities can be no more than ancillary to this main business. Loan origination and restructuring activity (for credit or special situations) will need some tailoring into the QAHC tax regime, but most “long” investment strategies should generally be capable of falling within this requirement.

No listed equities: The exception to the above is for platforms pursuing a strategy of investing in listed equities. There are possible exceptions for holdings of listed equities that are ancillary to a wider investment mandate (for example, holdings of small stakes following an IPO or stake-building ahead of a take-private), but a QAHC vehicle generally shouldn’t be used to construct a portfolio of listed, liquid equities.

No REITs or listing: The QAHC itself can’t be a UK REIT or have any equity securities listed or traded on a public market. If the conditions are assessed properly , most mainstream investment funds across credit, special situations, private equity, venture, and real estate should be able to include a UK QAHC within their fund holding structures. It is also possible for existing investment vehicles—including those offshore in places such as Luxembourg—to be brought into the UK and elected into the QAHC regime.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Oliver Currall is a UK tax lawyer and chartered tax adviser and co-heads Sidley’s tax group in Europe. A significant part of his practice focuses on advising clients on the structuring of investment funds and asset holding structures.

Noam Waltuch is a partner in Sidley’s US tax group. His practice principally focuses on advising clients on the US tax issues associated with the structuring and formation of investment funds.

Fraser Tudor is an associate in Sidley’s London office and has a broad UK and cross-border tax advisory and transactional practice.

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