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Draft Finance Bill 2022: The new asset holding company regime

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We now have a fairly good idea what the new asset holding company (AHC) regime will look like. Participants in the consultation process had stressed that for the regime to rival those of competitor jurisdictions (particularly Luxembourg), it must, as well as providing attractive tax benefits, be simple to use. So it is good news that most aspects of the regime set out in the draft legislation are relatively straightforward, albeit we have no drafting for several potentially complex issues still under consideration. The tax benefits for assets within the ring fence (especially non-UK land) are generous but, as expected, policed by tight eligibility criteria which stick to the original policy intent of focussing on funds and institutional investors, rather than making a play for foreign corporates. 

Of the eligibility criteria, the ownership condition takes up the most legislative space by far, and, although it could do with some refining (particularly the attribution rules for ‘relevant interests’) and clarification (for example, how the genuine diversity of ownership condition will be applied to close ended limited partnership funds), the overall principle, that qualifying AHCs (QAHCs) must be at least 70% owned by ‘good’ funds and institutional investors, seems straightforward. By contrast, the brevity of the draft ‘activity condition’ belies an area of considerable unresolved uncertainty. Essentially, HMRC does not want trading companies to be QAHCs, but, aware of the difficulty of applying the ‘badges of trade’ test, it is reluctant to expressly use ‘non-trading’ as an eligibility criteria. However, the solution in the legislation, of an investment test seemingly based on the investment trust rules, is problematic because the ‘investment’ requirement seems to be just the flip-side of the coin to a ‘trading’ one and the need to spread risk appears to prevent single (and perhaps limited) asset QAHCs. The government is still considering this criteria, so hopefully these proposals will be modified. 

It is hard to see any reason for the minimum capital requirement under consideration, other than saving revenue. If it is included, the threshold should be far lower than the suggested £50m to £100m and, ideally, only apply where the AHC is majority owned by a fund, with the threshold relating to that fund (rather than the AHC). Hopefully, the absence of draft legislation indicates government receptiveness to dropping the point. 

Although the government has confirmed that it will facilitate capital returns to investors by switching off rules that deem premiums on share buy-backs to be income distributions, detail is awaited on how this will be restricted to where the AHC’s underlying receipts are capital. If the government wants exact tracking, a simple solution may be elusive. It will be interesting to see whether a consequence of this relaxation of the tax distribution rules (without changing the UK’s relatively inflexible company law) and the lack of a complete exemption from stamp duty on transfers of QAHC shares, is that investors use Jersey incorporated (but UK tax resident) QAHCs.

So a promising start, but much for the government and the working group it is convening to resolve before the new rules come into effect from April 2022.
Issue: 1542
Categories: In brief