Qualifying Asset Holding Companies – Summer Sensation?

Our summer reading lists have an exciting new addition, with this week’s release of part of the draft legislation for the new Qualifying Asset Holding Company (QAHC) regime, and the response to the second stage of the asset holding company consultation. The intention is for the new regime to be in place for the 2022/23 tax year and beyond, in order to make the UK a more appealing jurisdiction for private equity holding companies.

The legislation follows the government’s wider review of the UK funds regime and builds on the dialogue between the Treasury, HMRC and the private equity industry (including BDO’s private equity specialists) over recent months.  

A major theme we saw from the discussions with HMRC was getting the balance right between preventing abuse of any new system, and making it simple enough to be attractive and encourage fund managers to use holding structures in the UK. While the new legislation will take some time to digest, the initial impression is that HMRC have listened to the points raised by BDO and others through the process. Among other things, the draft rules provide for: 

• A QAHC to benefit from an exemption from withholding tax on interest payments on shareholder loans, 
• An exemption from the late paid interest rules (and so an end to PIK notes?), and 
• A broad exemption from tax on gains on share sales.

The entry criteria for the regime focus heavily on the ownership of the QAHC – specifically the fund structures, as well as potentially being impacted by the financing and management incentive arrangements of the QAHC. At least 70% of the QAHC needs to be owned by ‘good’ investors, which will need to be carefully considered. The link between the tax structure of funds and the tax structure of transactions will continue to tighten as a result of these rules. There are also limits around the purpose for which the QAHC will be used.

The response document flags a number of areas where HMRC see potential for the regime to apply too widely, suggesting we may yet have some complex anti-avoidance rules to deal with which are not part of this first release. Whether these risk making the rules too complex to be workable will remain to be seen.

There is more legislation to come on this to complete the picture over the coming weeks and months. We will be working through the detail and sharing the highlights, so make sure our updates remain on your summer must-reads!