The Government believes that the rationale for bespoke rules for AHCs is clearest in structures where capital from diverse or institutional investors is pooled and managed by an independent, regulated or authorised asset manager, in which the AHC plays an intermediate, facilitative role. It is, therefore, looking to design rules that contain the following four sets of criteria.
1. Criteria for investors
Here, the intention is, essentially, that the rules should not apply in relation to funds or companies controlled by a small number of persons, such as members of a family or companies in common ownership. The Condoc sets out the following two possible approaches.
a) The regime could require that an AHC be wholly owned by a fund or number of funds that are each either a Collective Investment Scheme (CIS) or an Alternative Investment Fund (AIF), as defined for the purposes of UK regulation – with the Government also (importantly) considering including REITs and their overseas equivalents.
HMT are aware that this will not necessarily ensure that the fund is not controlled by a small number of investors other than institutional investors and, so, is considering whether the regime should also require that the fund vehicle either:
- meet a "non-closeness" or the "genuine diversity of ownership" test, or
- be unable to meet either of those tests only because it has one or more "qualifying investors" (perhaps using a similar definition to that in the non-resident CGT rules, so including certain institutional investors, such as pension funds).
HMT recognise that this would not address the situation where persons other than relevant funds hold stakes in AHCs (e.g. if fund managers co-invest at AHC level rather than through the fund). They are seeking views on whether and how to address this. This could be done via the second approach (see the next section below).
b) The regime could look directly at investors’ interests in the AHC itself to determine whether it was set up to benefit diverse or institutional investors (rather than requiring that the AHC be owned by a fund set up for that purpose). This might mean that a company could only qualify as an AHC if it is "non-close" (or is only close because it had one or more owners who was within a category of permitted investor e.g. a qualifying investor).
HMT recognise that there could be significant complexity involved in attempting to apportion the effect of AHC rules so that they were only available to some owners. Therefore, if the regime accommodated owners other than funds, this might mean that all owners could access its benefits, whether or not they invested via a separate fund vehicle.
2. Criteria for identifying investors
Here, HMT are looking to determine the investors in an AHC using a test that is consistent with the commercial reality of the arrangements. They anticipate that, broadly, a person making investments via an AHC will be a person who has an interest in and participates in the results of investment assets that the AHC acquires. This would mean lenders who advance fixed rate loans would not be relevant investors, whereas those who advance ones with a results dependent interest rate would be.
3. Criteria for management
HMT propose that an AHC should sit within an investment structure that uses an independent asset manager who provides investment management services, including managing fund assets, in return for an investment management fee. HMRC clarified, informally, that this meant independent from the investors.
The Proposals, therefore, consider how to identify what constitutes a manager (e.g. is it the person that contracts to perform portfolio and/or risk management with regard to the AHC's assets?) and what requirements that person must meet. On the latter point, HMT propose that investment assets held by an AHC should be managed by an undertaking that is authorised or registered for the purpose of asset management, subject to supervision in their jurisdiction and independent of investors. HMT appear to recognise there should be an exception from the independence requirement for carried interest and management coinvestment, but intend that it be subject to a cap. A question here is how this rule would be adapted to operate for internally managed structures also.
4. Criteria for the character and activities of the AHC
HMT want to restrict the regime to entities that serve to facilitate flows of capital, income and gains between investors and investment assets. The Condoc sets out different ways of achieving this and seeks views on them. An aspect of this is whether there should be a prohibition on trading. Issues with such an approach include that the question of whether a company is trading is often hard to apply and that not all other jurisdictions make this distinction. As, in the UK, whether a company is trading will depend very much on what the company actually does in practice, this cannot always be conclusively assessed upfront, when a fund may be deciding where to locate its AHCs, thereby reducing certainty and adding complexity to the regime.