Qualifying Asset Holding Companies (“QAHCs”) – important new UK tax reliefs

England and Wales

As part of its drive to increase the attractiveness of the UK as an asset management and investment hub, the UK Government has announced proposals for a generous new regime for the taxation of UK resident holding companies owned as to 70% or more by regulated funds or qualifying institutional investors. This follows extensive, and continuing consultation and is part of the government’s wider review of the UK funds regime. The intention behind the regime is to minimise tax leakage in the QAHC. It seeks to provide investors in QAHCs with after-tax returns similar to those which they would receive if they invested in the underlying assets direct, and for the intermediate holding company (a QAHC) to pay no more tax than is proportionate to the activities it performs. It is intended that this new regime will be introduced with effect from April 2022.

The current design of the regime facilitates this by (very broadly):

  • exempting certain profits and gains, on assets other than e.g. UK real estate, from corporation tax;

  • allowing deductions for certain interest payments made by QAHCs to its investors that would usually be disallowed as distributions;

  • treating shareholder profits on the repurchase of shares as capital gain if funded from capital gains arising to the QAHC’s exempt business; and

  • removing the obligation to withhold basic rate income tax from payments of interest on shareholder loans.

However, these tax reliefs will apply only if the QAHC is at least 70% owned by qualifying collective investment schemes or AIFs and/or by specified categories of institutional investors. It must also exist to facilitate the flow of capital, income and gains between such investors and underlying investments and not to undertake any significant trading activity. Details of the new tax reliefs and investor requirements are set out in more detail below.

Qualifying institutional investors

In order to qualify for the benefits of the QAHC regime at least 70% of the equity interests in the QAHC must be held by Category A investors. These are:

  • QAHCs;

  • collective investment funds, such as limited partnerships and AIFs which satisfy a complex diversity of ownership test and have regulated managers, or, in the case of companies, are non-close;

  • relevant qualifying institutional investors including (in each case subject to qualifying conditions): REITs, pension schemes, charities and insurance companies carrying on long term insurance business, and sovereign wealth funds;

  • a minister of the Crown.

Therefore only 30% of the QAHC may be held by investors who do not fall within these categories. The precise rules for calculating this are still being worked on and the draft legislation is not entirely clear, particularly as to the treatment of carried interest, indirect interests and aggregation with direct holdings in the QAHC. These will need to be clarified during the continuing consultation process, but the clear intention is that it will not be necessary to look through Category A investors even if they are transparent for other tax purposes. If a limited partnership is a category A investor, the intention appears to be that carried interest held through that partnership should not be included in this 30% allowance, although carried interest held in the QAHC direct will be included, as will any direct investments at QAHC level by others, who do not qualify as Category A investors purposes. Particular care will need to be taken with co-investment and parallel fund arrangements and with carried interest and management co-investment at QAHC level.

The new tax regime

The Government is concerned that UK-based fund managers are setting up foreign holding companies beneath limited partnerships and other alternative investment funds because UK resident companies are seen as tax inefficient for this purpose. Luxembourg holding companies are especially popular for this purpose and the combined effect of Brexit and new double tax treaty shopping rules imposed by the OECD BEPS (Base Erosion and Profit Shifting) project have led to increasing numbers of partnerships being established under Luxembourg law rather than in the UK. The analysis below considers the main tax problems affecting UK holding companies and how the new regime would address them.

Taxation of profits

The problem

The UK substantial shareholdings exemption (SSE) is not as generous as the participation exemptions in Luxembourg and some other jurisdictions. In particular, while SSE is generally available to holding companies selling holdings of 10% or more in trading companies, it does not fully apply to sales of investment companies (unless 80% by value of investors are qualifying institutional investors) so is of limited benefit for real estate funds.  Furthermore, although UK holding companies are generally not taxed on dividends, they pay corporation tax on other categories of income such as interest and rental income and on capital gains outside the SSE and the main rate will rise to 25% in 2023.

The solution: 

The QAHC regime will provide a wide corporation tax exemption for gains on disposal of:

  • overseas real estate, (although losses generated from such disposals will not be allowable against chargeable gains on other assets). It is not currently proposed that this exemption will be contingent on the disposal being subject to tax in an overseas jurisdiction – and so in this respect it is more generous than the analogous exemption for revenue profits;

  • shares in UK or non-UK companies which are not “UK-property rich”, i.e. do not derive at least 75% of their value from UK land; “Shares” for this purpose includes the interests of members in companies with no share capital and the interests of co-owners of shares. There are no apparent requirements as to the size of the shareholding, type of business carried on by such companies or rate of tax paid by them (unlike the participation exemption regimes in Luxembourg and some other jurisdictions) although the UK CFC regime may impose corporation tax liability if profits are regarded as diverted from the UK to companies controlled from the UK.

The regime also provides exemption from corporation tax on income in respect of:

  • overseas property business profits, including rental income, but only to the extent that these are taxed in a foreign jurisdiction; “taxed” for this purpose means subject to a tax equivalent to UK income or corporation tax and not exempt from tax nor taxed at a nil rate. It therefore applies even if the rate of such tax is significantly below the prevailing UK rate, whereas normal UK rules would generally impose corporation tax on the difference between the two rates; and

  • profits arising from loan relationships and derivative contracts that the QAHC is party to for the purposes of its overseas property business. In particular this removes liability to tax on interest and other returns on loans by the QAHC to property holding subsidiaries and portfolio companies. Where the loans or derivatives are not solely for this purpose, the exemption will apply only to the proportion attributable to the overseas property business.  

There is no specific QAHC exemption for dividends but a QAHC would benefit from the general corporation tax exemption for most UK and foreign dividends.

UK property investment is permitted but income or gains in respect of UK property or shares in UK property-rich companies will be taxed in the usual way so a UK REIT remains, in many cases, a preferable structure for real estate investment in the UK. The Government is considering how QAHCs can hold interests in REITs and vice versa.

The tax exempt element of the QAHC’s business will be ring fenced from its non-exempt business. It is proposed that any capital gains or losses arising to a QAHC from non-qualifying items will be able to be reallocated to another member of the corporate group that is not a QAHC.

Restrictions on tax deductibility of interest

The problem

UK companies are entitled to less generous interest deductions than those available in some other jurisdictions, notably those with flexible securitisation vehicle regimes and Luxembourg where practice has historically been to tax only a narrow margin of profit on loans to and by a holding company , with results-dependent interest  generally deductible.  In particular the UK treats results-dependent interest on loans as a distribution so the paying company is not allowed a tax deduction for such interest.

The solution

Interest on loans which are “relevant special securities” will no longer be treated as a non-deductible distribution if the securities are entered into by the QAHC for the purposes of its ringfence business. These are loans on which the amount of interest, premium or other returns depend to any extent on the results of the company’s business or any part of its business. Amendments to the UK hybrid mismatch rules may be required to prevent disapplication of the QAHC’s tax deduction. Distribution treatment will still apply to results-dependent interest if other equity features apply, including rights to convert into shares, or rights to acquire shares. Furthermore, the “late paid interest” rules will be disapplied, allowing interest deductions on an accruals basis (rather than only on eventual payment).

The share redemption/buy-back rules

The problem

On redemption or repurchase of shares in a UK company UK corporation tax treats any payments exceeding the amount paid on subscription for the shares as distributions of income rather than capital distributions, even where what is being distributed is the profit or proceeds of sale of one or more of a holding company’s investments. As a result, what was a capital gain in the hands of the holding company becomes liable to income tax in the hands of  UK resident individuals and other non-corporate shareholders. This is a major problem for individuals who hold carried interest in funds which distribute sale proceeds as they pay tax at rates up to 38.1% on distributions but only 28% for gains representing carried interest and 20% on other capital gains.

Where the holding company is a non-UK company, this automatic income distribution treatment does not apply and, where the repurchase is a capital transaction in local law, the payment is treated as capital for UK tax purposes. In Luxembourg, the redemption of a whole class of shares is treated as a partial liquidation rather than a distribution, so Luxembourg holding companies are commonly set up with multiple share classes to facilitate class redemptions after major investment sales.

The solution

Profits made by individual shareholders on repurchase of their shares by a QAHC will no longer automatically be treated as distributions and will be treated as capital rather than income where, broadly, these derive from capital gains realised by the QAHC on the underlying investments within the ringfenced business. Unlike in Luxembourg, there will be no need to create multiple classes of shares for this purpose. There will also be a new stamp duty exemption for such share repurchases.

UK withholding tax on interest

The problem

The UK generally imposes withholding tax on interest paid to lenders other than UK companies and banks, and on interest paid to non-UK residents in the absence of a double tax treaty, and loans are often structured as Eurobonds or discount notes to prevent this. Even where there are treaties between investors’ jurisdictions and the UK, there are administrative costs and delays in applying for relief or reclaiming excess deductions, and additional complications can arise if the investor’s jurisdiction does not treat an investment partnership as transparent. Several other jurisdictions, such as Luxembourg, do not impose withholding tax on interest so can be more attractive holding company options.

The solution

There will no longer be any obligation to withhold tax on interest paid to shareholders and others with a “relevant interest” in the QAHC, broadly those with a direct or indirect interest in its profits or assets or a proportion of the voting rights. Withholding tax may still be payable on interest on third party loans unless exemptions apply under the existing rules.

Tax avoidance

The regime will include targeted anti-avoidance rules to prevent its use in circumstances not within its intended scope. These are not included in the draft legislation and remain subject to continuing consultation.


This new regime is a welcome, and largely successful,  attempt to address the tax barriers to use of UK holding companies. Some of the detail remains to be clarified and we will be involved with professional bodies in contributing to this process and will publish more details in due course.

The policy paper, draft legislation and explanatory notes can be found here.

The Government’s response to the second consultation can be found here.

An overview of the key tax changes for the real estate sector contained in HMRC’s numerous publications on 20 July can be found in our Law-Now here.