It’s been two years since the UK launched the Qualifying Asset Holding Company (QAHC) regime as part of Finance Act 2022. I sit down with Ed Peters, Tax Partner in BDO’s Real Estate and Construction team in London to discuss what we’ve learnt about the QAHC regime and how it’s impacted the industry.
Firstly, I must ask – how do you pronounce QAHC?
A good question to start. Whilst there are some proponents who will use “Q-A-H-C” or “Quake”, most of the industry appears to have landed on “Quack” as the most appropriate pronunciation. Cue lots of duck related jokes from advisors!
On a more serious note, some of our readers may be wondering what a QAHC is – can you briefly summarise?
The QAHC regime is a preferential UK tax regime which was introduced in 2022 following an extensive consultation with various industry bodies and representatives. The aim of the new regime is to mitigate potential taxation barriers to asset holding companies established by collective and institutional investment structures being located in the UK. The main driver behind this is to try and ensure that these asset holding companies are established in the UK, bringing about fiscal and economic benefits, particularly increased high value employment within the region.
In this context, a QAHC is simply a limited company which has made an election to be treated as a QAHC. It can be made by either a UK limited company, or a non-resident company – but only if the company is a UK tax resident. Therefore, we are seeing both newly established asset holding structures which are set up as UK limited companies from the outset, but also non-UK incorporated companies with UK management and control. The latter structures are, in our experience, either a product of onshoring existing non-UK resident structures or reflect the use of non-UK incorporated companies to benefit from company law in a different jurisdiction to the UK (e.g. Jersey company law).
In simple terms, the QAHC regime has been designed to recognise the circumstances in which asset holding companies are established to hold investments for investors, and modify accordingly certain tax rules, both for those companies themselves, but also in respect of profits passed back by them to investors. The QAHC regime is, importantly, not intended to affect the corporation tax treatment of profits from trading activities (a QAHC is not generally able to undertake substantial trading activities) or UK real estate, and these remain fully taxable in the UK (subject to the usual rules).
So, the QAHCs were introduced to change behaviours – have you seen this in practice?
In a word, yes. One of the interesting aspects of the QAHC regime is that whilst the election is made by the company itself, as noted above, the rules also potentially benefit the investors themselves. Therefore, in our experience, there is usually some benefit which comes from the use of the regime so amongst our client base we are seeing many structures which are now being implemented with QAHCs within them.
What are the main reasons you see people using QAHCs?
The most common reasons we are seeing for their use are:
- The full exemption from withholding tax on interest paid by a QAHC
- More flexible capital gains exemptions on share disposals
- Simpler rules on the deductibility of financing expenses incurred by a QAHC, and
- Preferential rules for returning funds to fund/investment managers who have established the structure
And what are the reasons you see people sticking with the alternatives?
One critical point is that QAHCs are not available to every structure. Only those owned by ‘funds’ or certain types of institutional investors can elect into the regime. Therefore, a lot of our clients (such as family offices or privately owned groups) cannot benefit from the regime.
Beyond that, since the UK’s departure from the EU, notwithstanding the domestic UK tax benefits of using a UK asset holding company, there can still be non-UK tax disadvantages to the use of a UK asset holding company versus the use of a Luxembourg holding company structure for EU investments. Therefore, to some degree we are seeing clients either starting to use UK holding companies, or ‘doubling down’ on their Luxembourg establishments and focusing on developing breadth and depth in their Luxembourg operations. Other clients are continuing to maintain Channel Islands holding structures, either because the QAHC benefits are not substantial enough to merit a change or because they want to stick with their existing service provider (or both).
Finally, there is an element of additional cost and complexity to the use of a QAHC structure (from some additional reporting which is required) – whilst it is not usually material, for smaller funds and structures this may lead them to continue with their usual structures.
Ed Peters advises clients – listed, private equity backed, UK and international – on all tax aspects of real estate and corporate transactions, financing structures, international tax issues, and due diligence, as well as working closely with clients on dealing with their tax compliance and reporting requirements, and disputes with tax authorities. Ed particularly specialises in advising on the establishment of real estate funds and investment structures and has a deep knowledge of UK tax matters relevant to this including the capital gains exemption election and Qualifying Asset Holding Company regimes.
IQ-EQ provides incorporation, domiciliation, directorships and company secretarial services under the QAHC regime. Once your structure is up and running, experienced professionals manage corporate compliance and governance, as well as all aspects of QAHC administration, accounting and reporting. At the conclusion of the entity, we will work with your legal and tax advisors to ensure an efficient winding down process, reporting to HMRC and transaction management.
Contact us today to learn how we can put our expertise to work for you.
