Six months on from the introduction of the Qualifying Asset Holding Companies (QAHC) regime into UK tax law, there is a definite trickle of private equity funds opting to use the regime for their holding vehicles, with yet more actively considering it. In just the first quarter, notifications to HMRC for entry into the regime were in (low) double digits, which isn’t bad for a sector that more often waits to see what others are doing before making a leap.
Why QAHC?
As a quick recap, to boost the attractiveness of the UK as an international asset management centre, the UK government launched a consultation aimed at the asset management industry in Budget 2020. A key feature of this was to explore the attractiveness of the UK tax system for asset holding companies, being the special purpose vehicles through which funds typically make their investments. Following the review, the QAHC regime was introduced into UK tax law, taking effect from 1 April 2022.
Where interest has been piqued by the benefits of a QAHC, attention quickly turns to the eligibility of a holding company to elect into the regime. In this article, we take a closer look at one of the key qualifying criteria for entry into the regime – the ownership condition.
Managing the ownership condition
The ownership condition is the most complex of the entry conditions for the regime and, for some of the more dynamic fund structures, it will require a bit more work to confirm eligibility.
Broadly, the ownership condition requires at least 70% of the ‘relevant interests’ in the QAHC to be held by Category A (ie ‘good’) investors. However, the statutory definition is more nuanced than this, and actually requires that the total relevant interests held by persons who are not Category A investors should not exceed 30%. This matters because of the way the relevant interests are calculated.
‘Relevant interests’ are defined as including voting rights, entitlements to profits available for distribution, and assets on a winding up and, since the largest of those interests count, the total can exceed 100%. This outcome is specifically contemplated in the legislation, which states that no adjustment is to be made for this outcome.
Another quirk is that the calculation is carried out for each separate class of shares such that any ‘enhanced classes’, which entitle any non-Category A investors to more than 30% of, say, profits available for distribution, make the company ineligible for the regime. Category A investors are broadly:
- Other QAHCs
- ‘Qualifying funds’ (see below)
- Relevant qualifying investors (broadly, a defined class of investors, such as pension funds, sovereign investors, life assurance businesses)
- Intermediate companies, and
- Certain public authorities.
Funds are considered to be ‘qualifying funds’ if they are:
- A collective investment scheme (CIS) that meets the genuine diversity of ownership (GDO) fund condition
- A CIS or Alternative Investment Fund (AIF) that is 70% owned by Category A investors, or
- A CIS or an AIF that is non-close.
Where a fund meets the GDO fund condition, this is helpful, since it won’t require ongoing analysis to test the ownership interests of that fund, though other investors into the QAHC will need to be monitored to ensure that the 30% ‘bad investor’ threshold is not breached. The GDO fund condition broadly requires the fund to be actively marketed and made widely available. In contrast, the other two options require continuous monitoring, which could become burdensome for structures that see more frequent ownership changes.
Co-investments and carried interest structures, parallel funds and feeder type vehicles also add to the fun when working through the ownership tests. However, we expect that those funds that have a strategy of using QAHCs are likely to design newer structures that can take advantage of the regime.
Breaching the ownership condition … and cures
If the conditions for a QAHC are failed, the company will cease to be a QAHC immediately, which can have certain corporation tax consequences. However, there are cures for certain breaches.
For non-GDO structures, a QAHC is given a ‘cure period’ in relation to a non-deliberate breach of the ownership condition if the 30% threshold is not breached by more than 20% (ie not more than 50% bad investors), and the QAHC has complied with the ownership test monitoring requirements. The cure period is 90 days from when the QAHC became aware of the breach (or such longer period as HMRC may agree to).
To QAHC or not to QAHC?
Most of the interest in QAHCs has come from overseas real estate funds, debt funds or those where the majority of the fund’s investment team are based in the UK.
New fund/holding structures are the obvious contenders for considering the use of QAHCs. Deal structures on live deals are also beginning to contemplate the use of QAHCs in the holding structure. Existing UK stacks are also beginning to be revisited for potential entry into the regime, as is onshoring of existing overseas holding companies through moving their central management and control or carrying out a reorganisation to help qualify for the regime.
Given the increasing requirement by tax authorities around the world to demonstrate substance in structures (ATAD 3 - EU proposals on shell companies being the latest iteration), fund structures using previously popular jurisdictions, such as Ireland and Luxembourg, are beginning to face increasingly onerous and expensive substance requirements. As a result, we are seeing many mid-market funds with majority London based investment teams taking a serious look at QAHCs to see if they are the right fit for them.
Please contact a member of our team to discuss whether a QAHC would be a good fit for your next venture or acquisition.