HMRC Announces Welcome Changes to the QAHC Regime
On 20 July 2022, the UK government published draft legislation for the Finance Bill 2022-2023.
Of particular interest are amendments to be made to the qualifying asset holding company (QAHC) regime that was introduced from 1 April this year.
The regime is part of the UK government’s attempt to increase the attractiveness of the UK as a jurisdiction for asset management and introduces a simplified tax regime applicable to QAHCs that should, broadly, tax investors as if they had invested directly in the underlying assets. Please see our submission to the 2021 PIF Annual Review and Outlook here for the circumstances in which the regime is available and its benefits.
The QAHC regime was introduced reasonably quickly and contained some limitations on how an asset holding company owned by a private fund could qualify as a QAHC. In particular, one of the main conditions to qualify as a QAHC is that the asset holding company is owned as to at least 70% by what are described as Category A investors. In the context of private funds, the most useful Category A investor is a “qualifying fund”. That is a collective investment scheme (as defined for UK purposes) which meets a “genuine diversity of ownership” test. The “genuine diversity of ownership” is based, broadly, on the fund being widely marketed.
This requirement raised questions about whether asset holding companies that were owned by either a number of parallel fund vehicles (as will often be the case to cater for different classes of investor) or by a master fund itself owned by feeder funds into which the investors invest.
The recent amendments to the regime have been introduced to ensure the conditions to be a QAHC better align with the initial intended scope of the regime by extending the “genuine diversity of ownership” tests to parallel funds and master funds where, looked at in aggregate with the other parallel funds or the feeder funds, the test would be satisfied.
As HMRC notes, in a parallel fund structure, the interests in one fund may be widely marketed and made available, but certain investors will then invest via a different fund based on their particular characteristics. That parallel fund might not, itself, be widely marketed. Similarly for master/feeder structures, with the overall fund being marketed but the master fund itself, which will be the investor in the asset holding company, not being directly marketed. This meant that it is not clear under the existing rules whether the diversity of ownership condition would be satisfied by these common fund structures.
To rectify this unintended issue, the amendment to the QAHC rules relevant to parallel fund structures provides that a fund will be treated as meeting the diversity of ownership condition where it is closely associated with another investment fund that satisfies the condition because it is widely marketed and made available. The vehicles must also satisfy conditions requiring investments in substantially the same assets, holding investments using the same companies on substantially the same terms and in the same ratios, and the management of the funds to be substantially coordinated such that they act together in relation to their investments as if they were a single fund. HMRC notes that this means funds will be prevented from being treated as parallel if they each own shares in the same potential QAHC of different classes and those shares carry materially different rights (i.e. not substantially the same asset). Additionally, the updated legislation will not apply to a parallel fund if the main purpose, or one of the main purposes, of the arrangements that result in it being a parallel fund is so that the diversity of ownership condition is satisfied.
To deal with the master/feeder fund structure, the master fund (referred to as the “aggregator fund” in the rules) can be treated as meeting the diversity of ownership condition provided that the feeder funds into it meet that condition (or are treated as doing so by reason of the change to the rules referred to above).
The changes for parallel funds and master/feeder funds will apply from a date to be confirmed.
In addition to this, the amendments have dealt with another, unconnected issue with the existing rules. To be a “qualifying fund” (and so a Category A investor in a QAHC), the fund vehicle has to be a collective investment scheme (CIS) for UK law purposes. Certain types of non-UK vehicle that would be a collective investment scheme in general terms might not be if they are constituted as a body corporate under their law of establishment. The QAHC rules are amended to state that fund entities that would be a CIS if they were not a body corporate are treated as if they were a CIS and so can be qualifying funds provided that they meet the other conditions for them to so qualify. This change is retrospective and applies from 1 April 2022.
Finally, in relation to calculating the ownership of a QAHC, there is an anti-fragmentation rule that aggregates the different interests of a direct investor in a company with their indirect interests. This rule is now extended so that it applies in circumstances where interests are held indirectly through one or more QAHCs. This change limits the QAHC qualification by excluding from the regime investment structures involving more than one QAHC in which the combined percentage owned by non-Category A investors is greater than 30% and came into force on 20 July 2022.
These changes are very welcome and prompt changes to the regime and remove significant barriers to a wide uptake of UK-based QAHCs in fund structures and add to the equally welcome clarification of the application of the QAHC regime to UK lending companies established by credit funds that we discussed in our previous Tax Talks blog.