Following two years of consultation, the UK qualifying asset holding company (QAHC) regime has opened its doors.
From 1 April 2022 qualifying companies can now elect into the regime. The new framework is designed to improve the attractiveness of the UK for below the fund holding vehicles by offering a number of simplifications and benefits over the existing tax system. As a result the UK now offers a meaningful alternative to other European locations for holding investments.
One of the unique features of the UK regime is the entry conditions. For most standard structures satisfying the conditions will be relatively easy, but for anything more complex the conditions will need some attention. One of the main conditions for entry is the ownership condition which means that the QAHC must not be held by non-Category A investors (i.e. bad investors) by more than 30%. The list of good investors (referred to as Category A investors) includes CIS and AIFs which are widely held, and certain other institutional investors like REITs, life insurance businesses, pension funds and sovereign investors. More detail around the ownership condition can be found in our recent Tax Journal article that walks through the legislation and its application to typical structures in a private equity and credit fund context.
Entry and exit to the regime is on an elective basis. Companies opting into the regime will be subject to a deemed sale and repurchase of the assets at market value to ensure accrued gains up to the point of entry are taxed. Critically, QAHCs can still avail themselves of the substantial shareholding exemption on entry if the QAHC continues to hold the shares for the requisite period.
Notification to enter into the regime needs to be made to HMRC via its electronic form declaring that the company meets all the eligibility criteria at the date of entry, although there is a two year grace period for meeting the ownership condition which may prove useful if the relevant interests are not immediately held. The other administrative point to note is that at the end of each accounting period a QAHC information return is required in addition to the corporation tax return. HMRC has set up a dedicated team to support the set up of the regime and answer any queries.
Although the regime is now live, work continues to smooth out some of the rough edges within the legislation and guidance. Two strands of discussion are ongoing with the Government at the moment. The first is around providing more certainty around the investment strategy condition as the guidance offers no material comfort that credit funds will easily satisfy the requirements (although we note this has always been our expectation). The guidance merely says it will depend upon the particular facts and refers to general guidance which does not provide the nuance around certain strategies. The second area under exploration is whether the legislation can be amended to allow parallel partnerships to qualify. These are often constituted to meet the needs of a small number of investors, and as such are likely to be close and/or not meet the genuine diversity of ownership condition.
There are a number of other aspects of the ownership condition that could do with further refinement which we hope will be addressed in a forthcoming finance bill, however for now, the regime is open and there is no reason why the regime will not work well for many funds.