A regular briefing for the alternative asset management industry.
An important part of the UK government's post-Brexit review of the UK funds regime is its commitment to a new set of tax rules for UK-resident asset holding companies. As we reported in January, a competitive regime – with benefits similar to those already available in Luxembourg and Ireland – would enhance the UK's position as a centre for asset management. The latest developments are encouraging, suggesting that the Treasury is determined that, when the new rules become effective in April 2022, they will meet the industry's needs.
Having issued a second consultation at the end of last year, significant industry engagement has improved part one of the proposals, which were published last month. The draft legislation is not yet perfect and – as the tax authority, HMRC, knows – many of the rules which are yet to be published are some of the most important bits to get right. But it is now likely that many alternative asset managers will want to integrate UK holding companies into their toolkit when the changes take effect next year.
Under the latest proposals, a company will be able to opt into the new regime if it is at least 70% owned by pension funds, charities, sovereign wealth funds, insurance companies, or a "diversely owned" fund managed by a regulated manager – a category that is likely to include most private funds. There are two key exclusions: neither trading activity nor holdings of UK land can benefit from the new rules.
The tax treatment of a qualifying UK holding company will be adapted to recognise its status as a holding vehicle: it will be exempt from capital gains, it will receive a tax deduction for any interest it receives from profit participating loans, and there will be no requirement to withhold tax on interest on debt held by the company's investors.
There are a multitude of possible uses for the new UK holding company, including for the stack of new companies used on a buyout, as a master holding company, as a "fund of one" for a managed account, or as part of the plumbing beneath some credit funds. The new vehicle could also be an attractive way to hold non-UK real estate.
... The new tax regime for UK holding companies is welcome news for those hoping for concrete action from the government to stimulate the financial services sector after Brexit, and it has both the potential and momentum to fulfil the market's high hopes ...