CMS Expert Guide to Holding Company Regimes in United Kingdom

In 2022, the UK government introduced a generous new regime for the taxation of UK resident holding companies – the ‘Qualified Asset Holding Company’ (“QAHC”) regime. The intention of the regime is to provide to the investors in the QAHC after-tax returns which are similar to those which they would have received if they invested in the underlying assets directly. The regime’s features have been well-received by the UK’s asset management sector.

QAHCs are designed to provide after tax returns similar to if the investor held the asset directly, and for the QAHC to pay no more tax than is proportionate to the activities it performs.

The design of the regime facilitates this via the following.

• A full corporation tax exemption for gains on non-UK real estate and shares that are not UK property-rich.
• Exempting profits from UK tax where they are subject to overseas taxation.
• Removing withholding tax on interest payments (generally, payments of interest with a UK source are subject to UK withholding tax at 20%).
• Allowing share buybacks to be treated as capital gains in the hands of the investors (as opposed to the usual income treatment, which results in a higher rate of tax for individual investors).
• Exempting share buybacks from UK stamp duty reserve tax – while SDRT is levied at the low rate of 0.5%, this can prove a tax barrier where the value of the shares are particularly high, as is often the case for pooled investments.
• Allowing deductions for profit participating loans (which are usually disallowed).
• Allowing for interest relief on an accruals basis.

At least 70% of a QAHC must be owned by “institutional investors” – this includes, for example, pension schemes, insurance companies, and certain widely held corporate and fund structures.

While UK real estate, and UK property rich shares, may be held in a QAHC, any gains from UK real estate will not benefit from the generous corporation tax exemption.

The main activity of a QAHC must be an investment business, with any other activities being ancillary. The company must invest its funds with the aim of spreading investment risk and giving investors the benefit of its fund management.

In order to enter the regime, a company must make an entry notification to HMRC, confirming its eligibility. Separately from its company tax return, a QAHC must make an annual information return containing details of, for example, assets and disposals. Breaches of certain conditions can lead to disqualification from QAHC status.

The UK’s broad range of exemptions from corporation tax on dividend receipts is one of its most attractive features for holding companies. Unlike some other jurisdictions, the starting position is that interest payments with a UK source are subject to withholding tax at 20% – although specific domestic exemptions exist, and the rate may be reduced or eliminated via applicable double tax treaties.