Tax

Osborne Clarke responds to consultation on taxation of asset holding companies in alternative funds structures

Written on 26 Feb 2021

New regime would be a positive step but wider questions need to be addressed around VAT, withholding taxes and the taxation of carried interest

The government's proposal to introduce a new UK asset holding regime for alternative fund structures has signalled that it wishes to remain competitive on the international stage, but our recent detailed response to the latest consultation and call for industry views highlighted that there are still many complex issues with which to grapple before legislation is introduced.

HM Treasury published a consultation on 15 December 2020 seeking views on the detailed design features of a new regime for asset holding companies (AHCs) in the UK. This followed an initial consultation launched in March 2020 and is part of a wider government review of the funds industry, which aims to make the UK competitive with other fund vehicle and asset holding company jurisdictions, notably Luxembourg. It is expected that the regime will be introduced in the Finance Act 2022, with draft legislation published later this year.

AHCs are companies used as intermediate entities in investment fund structures (including private equity funds, real estate funds and credit funds). Their role is to facilitate the flow of capital, income and gains between investors and underlying investments. Historically, the UK has not been an attractive asset holding company jurisdiction due to barriers in the tax system – in particular VAT. However, alongside this consultation, the government is also undertaking a review of VAT on fund management fees, which it is hoped will report soon and will include within its scope fees charged to AHCs.

Bespoke regime

The government's aim is to create a new regime for AHCs in the UK, which ensures that their investors do not achieve a worse outcome than if they had invested directly in the underlying investments. The consultation suggests that the regime should include the following features:

  • Robust eligibility criteria to limit access to the intended users.
  • An approach to taxation of the AHC itself that will ensure any tax it pays is commensurate with its role. The consultation proposes that there will be an exemption from capital gains tax realised by the AHC on disposal of investment assets, except for UK land or UK "property rich" assets, and, potentially, an exemption from UK withholding tax on payments of interest from an AHC to investors.
  • Rules for UK investors to ensure that they are taxed on income and gains received from an AHC broadly as if they had invested in underlying assets directly.

In our response to this latest consultation, we are very supportive of a bespoke AHC regime that addresses the tax barriers to establishment of AHCs in the UK. However, we also highlight that the regime must be simple, easy to understand and, importantly, must provide certainty of the tax treatment on a future taxable event. We also need to have confidence that any new regime will be stable and not subject to constant change, revision and clarification. We believe that a system in which reliefs and tax charges are capable of being determined when the fund is established and are not subject to change by reason of a change in the investors should be the aim of any new regime.

We also suggest in our response that the scope of the regime must be comprehensive enough to deal with all of the issues that currently make the UK an unattractive asset holding company jurisdiction. In particular, it is very important that HMRC develops a sensible and long-term solution to the VAT treatment of investment funds at the same time as the AHC regime. Accordingly, announcing the results of and proposals flowing from the VAT review on fund management fees at the same time is critical.

Osborne Clarke comment

While we welcome the government's proposal to institute a new AHC regime in the UK, there are wider questions (such as VAT, withholding taxes and the taxation of carried interest) to address alongside the specific questions of design raised in the consultation. It is important that the AHC regime is fit for purpose and will encourage, and give confidence to, fund managers to locate as much of their fund structure as possible in the UK, as opposed to the tried and trusted asset holding company jurisdictions. It is, however, encouraging to see the government pressing ahead with this consultation and the wider discussion around funds to ensure the ongoing competitiveness of this fundamental element of the financial services sector.

If you would like to discuss the consultation and our response in more detail, please speak to one of the contacts below.