What is the qualifying asset holding companies regime?
Asset holding companies are utilised by investors to pool their investments. One of the central motivations of an asset holding company is to ensure that the ultimate investors in the underlying assets are able to invest in a way which is comparable to the tax effects they would suffer if they had directly invested in the underlying asset absent the holding company.
In 2022 the UK announced the introduction of the qualifying asset holding companies regime (QAHC) in an effort to improve the UK as a location to base asset holding companies, to align with the UK’s investment management expertise. The QAHC regime will encourage onshoring funds versus basing them, for example, in Luxembourg or Ireland.
The regime is available to asset holding companies which meet certain conditions. These are amongst other things (i) being UK resident, (ii) having a certain threshold of ownership by investors (such as pension funds, long term insurance businesses etc), and (iii) conducting mainly investment activity.
The benefits offered by the regime are advantageous and minimise taxes up to the investor level. Notable tax advantages include:
- Gains and disposals of qualifying shares and overseas land are exempt from corporation tax.
- Profits of an overseas property business are exempt from corporation tax (in certain circumstances).
- No WHT is payable on interest payments made by the QAHC.
What are the problem areas?
The QAHC regime is a complex area of tax law and the regime is newly introduced, hence there is limited guidance on how the regime will operate in practice for asset holding companies. Moreover recent HMRC behaviour has limited the reliance that can be placed on guidance.
Complications can arise in a number of areas but a key subjective aspect is the ‘investment intention’. For example:
- To what extent will the tax treatment be tainted by non-investment activity?
- Does an unforeseen sale of assets after a short period of time pose a problem?
- Is there sufficient evidence to support an investment intention in the event of an audit?
- Will debt fund activities be sufficiently passive?
How can tax insurance help?
A tax insurance policy offers an indemnity for a specific tax event and can be tailored to cover identified risks in the QAHC regime.
For example, a QAHC may receive a large unsolicited offer for an asset shortly after acquiring such asset. A tax insurance policy can protect against disqualification from the QAHC regime because of the sale being considered by HMRC to meet the criteria of a trade rather than an investment. Tax insurance negates the risk for the QAHC and its investors allowing the sale to occur and value to be realised. Tax insurance will not be appropriate for every QAHC, but it can add comfort for complex scenarios or unforeseen activity.
To get in touch and find out how tax insurance can work for you, please contact Richard Taylor-Whiteway (Brockwell Head of Tax).