Knowledge

Background

In 2022, the UK government introduced the qualifying asset holding company ("QAHC") regime, with a view to assisting the UK asset management industry.  When used as holding vehicles which meet the conditions of the regime, QAHCs offer significant benefits.  The regime is also comparatively straightforward, not relying on tax treaties or complex exemption arrangements. 

With QAHCs being given considerable tax benefits, there has been a great deal of interest from asset managers and investment funds in using QAHCs as holding vehicles. 

A key requirement for QAHCs is that they must be UK tax resident.  This does not, however, mean that a QAHC needs to be a UK incorporated company; it is straightforward for a Jersey company to become tax resident in the UK, and there are a number of benefits in using a Jersey company as a QAHC.

The UK tax benefits of the QAHC regime

The QAHC regime aims to tax a QAHC's investors as if they had invested directly in the underlying assets, and for the QAHC to only pay tax on a small margin to reflect its role as an intermediate holding company and the activities it performs.

To achieve this, the QAHC regime provides a number of UK tax benefits. In broad terms, these include the following:

• QAHCs are exempt from withholding tax on payments of interest;
• gains on the disposal of shares (other than shares in companies which derive at least 75% of their value from UK real estate) are not chargeable gains;
• gains on the disposal of non-UK land are not chargeable gains;
• QAHCs are exempt from corporation tax on the profits of an overseas property business (to the extent that the profits are subject to tax in an overseas jurisdiction);
• an exemption from stamp duty and stamp duty reserve tax on a repurchase by a QAHC of its own shares or loan capital;
• on a share buyback, the full amount paid by a QAHC to its shareholder in relation to the buyback will be treated as capital (taxed within the CGT regime) rather than as income; and
• the QAHC regime permits interest under profit participating loans or results-dependent debt to be deducted from taxable profits.

The conditions of a QAHC

For a company to qualify as a QAHC, certain conditions must be met. These conditions include the following:

UK tax resident

A QAHC must be tax resident in the UK.  A Jersey company will be tax resident in the UK if it is managed and controlled in the UK.

The activity condition

The main activity of the QAHC must be the carrying on of an investment business.

The ownership condition

The sum of 'relevant interests' in a QAHC which are held by persons who are not 'category A investors' must not exceed 30%.

A "relevant interest" is one which confers voting power or a beneficial entitlement to distributable profits or assets on a winding up.

"Category A investors" include QAHCs, qualifying funds (including collective investment schemes and Alternative Investment Funds (AIFs) that are not collective investment schemes only by reason of being body corporates), qualifying investors (including long-term insurance businesses, sovereign wealth funds, UK Real Estate Investment Trusts ("REITS"), charities and pension schemes) and certain public authorities.

Meeting the investment strategy condition

A QAHC's investment strategy should generally not involve the acquisition of equity securities that are listed or traded on a recognised stock exchange (outside of a public to private transaction).

Benefits of using a Jersey company as a QAHC

There are various benefits to using a Jersey company as a QAHC. These include the following:

• Jersey is a leading investment funds and asset holding jurisdiction. Jersey has a deeply experienced talent pool, which includes fund and corporate administrators, accountants and lawyers;
• Jersey company law has a flexible maintenance of capital regime. This enables share redemptions, share buy-backs and dividends to be made simply and efficiently, on the basis of a solvency statement given by the directors of the company. There is no requirement for distributions to be made from 'distributable reserves' (as is the case under UK company law);
• there is no Jersey stamp duty on the sale of Jersey shares. Therefore, if the shares issued by a Jersey QAHC are sold, no stamp duty will apply;
• Jersey has no pre-emption rights implied by statute. Pre-emption rights need to be set out in the articles of association of a Jersey company or a separate contract; and
• Jersey private companies do not generally need to be audited or to file annual accounts.

Attractive investment vehicle

Given its generous UK tax benefits, a QAHC may be an attractive vehicle for investing in shares or non-UK land.  Using a Jersey company as a QAHC provides notable advantages as compared to using a UK incorporated company.

However, a QAHC may not always be appropriate, or feasible, and appropriate professional tax advice should always be sought.

Alternatives to QAHCs include:

• using the 'Quoted Eurobond Exemption', via a listing of the relevant debt on a recognised stock exchange (such as The International Stock Exchange ("TISE")), which allows a borrower to pay interest on the listed debt without the need to deduct UK withholding tax. The Quoted Eurobond Exemption is a familiar route to facilitate tax-efficient intragroup debt funding; and
• the UK REIT, which continues to be used as a UK tax efficient vehicle for investing in UK real estate. UK REITs may be listed on a qualifying stock exchange, such as TISE.

Bedell Channel Islands Limited is a leading TISE listing agent and can support issuers through the listing process (whether listing a quoted Eurobond, achieving UK REIT status or for other purposes) and ensure compliance with the TISE ongoing obligations regime.  Further information is available in our briefings on The International Stock Exchange - Listings, Capital markets: listing Jersey holding companies and UK REITs and The International Stock Exchange.

If you would like any further information on QAHCs or any other aspect of this briefing, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.