UK Asset Holding Firms: What Does the Future Maintain? – VAT

UNITED KINGDOM:

UK Asset Holding Companies: What Does the Future Hold?

March 01, 2021

Cadwalader, Wickersham & Taft LLP

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The UK Government's public consultation on Asset Holding

Corporations (AHCs) are just done after they started running December 15th.

2020 to 23 February 2021. The UK Government's goals in

The consultation was to improve the government

Understanding the AHCs, the fund structures in which they are used,

and the commercial drivers of their location as well

Introduce legislative changes that bring clear benefits

Facilitating the flows of capital, income and profits between

Investors and the underlying investments in the AHCs. The first

The consultation document was published as part of the United Kingdom in March 2020

Ministry of Finance 2020 budget (first consultation). The second

Consultation document (Second Consultation) was published in

December 2020 and launched the public consultation phase, the

has just closed.

In conclusion, the second consultation focused on the trial

Reduce a number of key barriers in designing a functional and functional

attractive regime for British AHCs. We have summarized some of the keys

Aspects of the second consultation below and have considered some

of the challenges for the government in each of the presented

Areas.

Width of consultation: one of the challenges for the UK

The government in the second consultation was far-reaching

Task of the AHC consultation itself. Both the first consultation

and the second consultation covered a variety of structures

and arrangements, including alternative loan funds,

Securitisations, private equity and real estate investments.

Creation of a viable AHC regime that is equally effective in all areas

A variety of asset classes have proven challenging.
International comparisons: The UK government has a clear

Aim in trying to get the status of the UK as a

global asset management and finance center. That goal would

well served by creating a popular, workable, and effective

AHC regime. UK companies could benefit from practical tax breaks

within an AHC regime, like the ease of being able to demonstrate

international tax base given the existing UK

Operations of many financial market participants. Benefits would

Follow the UK Treasury Department if a popular AHC regime can be created.

including direct tax benefits from pro-rata taxes and

the taxation of related employment. However, these are practical

Benefits can only be achieved if some outstanding challenges can be faced

away. One of the most important ones is how well the UK AHC regime would do

Tariff next to international competitors, especially those

in Ireland and Luxembourg. Is it enough for a British AHC regime?

offer comparable advantages compared to other UK domestic

Structures? Or should the AHC regime at least convey that?

same advantages as other international regimes, or even optimally

improve its international competitors?
Withholding tax: The UK has a 20% withholding tax

Interest payments on unlisted loan securities. By

In comparison, Luxembourg does not levy any withholding tax on interest

Payments for Loans. Any interest payment on unlisted UK debt

AHC should therefore have a way of eliminating them

Withholding costs, especially since some are investments in an AHC

likely made from widely used collective investment vehicles

where the eligibility of the contract may be difficult to track. Unless a

A withholding tax exemption for interest payments is in the

Britain's AHC regime, the international comparison with others

Regimes would be unfavorable and obvious.
Capital Gains and the UK Exemption:

Capital gains on assets within a UK AHC or AHC

Group, are a major topic of discussion in the second

Consultation. While the risk of UK corporate tax liability is on

Disposal of assets is less likely to be an issue for an alternative

Loan funds are highly relevant to the possibility of capital gains

for real estate investments by an AHC. Find a single

Solution that encompasses all asset classes and does not include a

disproportionate advantage for AHC investors compared to others

UK corporate investors have been one of the challenges in the

Second consultation.
Real Estate: Investors usually have to pay taxes on rent

Income and capital gains from real estate in the UK, even if these

Investors are based outside of the UK. This tax treatment for

Non-UK investors in UK commercial real estate have increased in the UK

Tax law in 2019. One of the questions in the second

Advice is on whether this should be the basis of UK property taxation

remain in the AHC regime, and how this tax regime could

effectively sit next to real estate outside of the UK

Participations within the AHC regime. A broader question to be addressed in

the UK Government's ongoing and parallel review of the UK

A real estate AHC could work in the fund industry

next to a UK REIT. While REITs and AHCs can support different ones

Investor base to ensure that these two regimes in a

Mutually supportive and non-distorting manner is something the

The government must achieve this.
Value Added Tax: For many years, industry associations and tax advisors have

advocated easing UK VAT rules

Management fees. VAT reimbursement for administration fees

The government in the EU has announced that it will encumber a British AHC will

The second consultation will be taken into account in the broader UK funds

Review. This is a visible distinction between Ireland and Luxembourg.

exempt from VAT that are currently certain management fees.

A change in sales tax rules for administration fees is likely one

from the bluebells as seen by the AHC consultation of

Investors and industry participants. In a post-Brexit context

if international tax competition is not considered optimal,

Such a change in VAT could be politically difficult to achieve.
Investor taxation: The questions as to how investors in a

UK AHC bear taxes and at what level (with the AHC or with the

at investor level) are some of the most complicated elements of the

Second consultation. For example, the government has proposed

a regime-specific exception for investment capital gains

the level of the AHC. However, the second consultation

suggested pinning this exception to a tracing proposal so that

Amounts returned to AHC investors that are attributable

Investment capital gains are treated as capital gains in the hands

of investors. Additional questions arise whether such

A traceability method would be simple, predictable, workable and

– perhaps most importantly – attractive compared to

comparable international regimes. The problem for the British government

is in the process of creating a regime that enhances the attractiveness of a

clear exemption, but still fair to the broadest group of

UK taxpayers using other UK investment structures and levels

Comparison with international competitors.
Legislative Timetable: After all, you might be forgiven

I wonder if the AHC project timeframe is too ambitious.

The public consultation took place from December 15, 2020 to February

23, 2021. Legislation is in place by the UK Government

Finance Bill 2021, a breathtakingly tight date for consultation

this complexity and far-reaching effect.

If all the challenges identified in the second consultations can

be resolved on a tax and political level within the UK

There is a possibility that the UK AHC regime could have a government

effective and cheap UK tax system compared to other domestic ones

Investment structures and possibly compelling when placed

next to international competitors. The fascination of watching

The progress of the second consultation is that of the UK

Position in a post-Brexit and post-COVID could die Europe

Suggestion for ambitious reforms. But what is just as uncertain is

is the extent to which other, more well-known fiscal burdens occur

Austerity measures and fears of an erosion of the tax base could speak against it

radical changes.

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Guide to the subject. Expert advice should be sought

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