QAHC: a big step in the right direction for the UK funds industry

The UK needs to work hard to make itself an even more attractive place to do business. That’s exactly what it’s doing by implementing the Qualifying Asset Holding Companies (QAHC) regime, which went live on 1 April and makes the UK a much more enticing domicile for investment funds. In this note we take a look at the new regulation and the benefits it provides and consider some of the other changes the UK could make to improve the competitiveness of its funds industry.

The background

The UK has long been a major force in the global asset management industry – with around £11 trillion in assets under management, it’s second only in the world rankings to the US. But this impressive position isn’t reflected in its status as a domicile for investment funds. In fact, the UK lags behind many other European countries, most notably Luxembourg and Ireland, as a fund domicile, with just 3.1% of global investment funds domiciled in the UK. That’s partly because there’s been a perception that some aspects of UK regulation and taxation are less friendly to funds, and that the UK offers a more limited range of options to asset managers.

In March 2021, in an attempt to attract more funds to domicile themselves in the UK, the government announced a review of the UK funds regime, seeking to “identify options which will make the UK a more attractive location to set up, manage and administer funds, and which will support a wider range of more efficient investments better suited to investors’ needs”.

Part of the upshot of this review is the QAHC regime, which aims to encourage funds to co-locate their legal holding structures with their existing operational set-up in the UK. With many funds having significant economic exposure to the UK, and many highly skilled investment professionals, the UK government is hoping to attract more funds to use UK holding companies. The changes will also help ease the pressure to move UK-based roles to the location of current industry-standard holding countries.

What is the QAHC regime?

The regime removes some historic areas of complexity for UK holding companies, thus providing a simplified basis of taxation for the holding companies of alternative investment funds. It is part of a wider reform of the corporation tax regime for funds that aims to enable firms to align their UK legal structures and bring them into line with peer jurisdictions commonly used in the sector.

The regime enables companies that meet the conditions to be a QAHC and have elected to become one to benefit from a variety of tax exemptions and simplifications. Together, these provisions aim to ensure there should be no incremental taxation on yield earned beyond the taxation in the investee territory and the final taxation borne by investors.

Some of the main benefits of the QAHC regime include:

• They are exempt from corporation tax on disposal of shares (so long as the shares derive less than 75% of value from UK land), and overseas profits from property
• They are exempt from withholding tax
• They are exempt from stamp duty

An encouraging development

The QAHC regime is clearly a step in the right direction for the UK funds industry, and in fact is a result of feedback from industry participants. It’s a good example of the UK regulatory authorities listening to the needs of industry players and using new regulation to improve the UK’s attractiveness as a place to do business. The new regime simplifies taxation for alternative investment fund holding companies, makes the taxation of funds more efficient, makes it cheaper and easier to set up funds, and encourages funds to align their legal holding structures in the UK and to hold private equity assets in the UK rather than Ireland or Luxembourg. Ultimately, it should be good news for investors too, as reduced costs should feed through into lower fees.

Mark Crathern, Head of NatWest Trustee and Depositary Services commented “We welcome this simplification of tax structures for UK-domiciled funds. There is a very competitive market to capture fund domiciles within Europe and these improvements will lead to increased choice and competition, which will ultimately be of benefit to investors. The UK has been positioning itself to play a pivotal role in the digitalisation of financial markets and this development will mean the UK is increasingly seen as a fund domicile of choice. This will inevitably lead to improved infrastructure and more solutions being delivered to the asset management industry.”

What’s more, QAHC forms part of a broader review by HM Treasury of the UK’s taxation of the funds sector and reflects an ongoing appetite to simplify the tax compliance position for taxpayers. For example, we have already seen:

• changes to the anti-hybrid rules earlier this year, simplifying the position for transparent funds.
• changes being made to facilitate the use by UK companies of deal-contingent foreign-exchange hedging, effective as of 1 April 2022.
• ongoing consultation on the tax treatment of UK fund vehicles.
  
  

Further improvements are needed

Some of the actions the UK could look to take include:

1.      Better promoting the UK’s strengths in fund governance.

In marketing its capabilities, the UK should put a more prominent focus on its high international standards of governance and investor protection. Strong, transparent and independent governance is a key differentiator for the UK as a jurisdiction. What’s more, the UK government could easily do more to publicise its funds industry. The government, the industry and regulators could work together to proactively promote the UK as a trusted funds domicile. In doing so, they could send a strong message that it is a leading global hub to set up and administer funds, and is open for business.

2.       Enhancing its existing fund range.

To meet the needs of domestic and international investors the UK could enhance its existing fund range, introduce new structures and adapt existing ones to ensure the UK industry’s range of available product types can compete with other jurisdictions.

3.       Building on its strengths in responsible investment. 

The UK has an opportunity to build on its strengths in responsible investment to become the pre-eminent global centre for ESG, meeting increasing demand for products with a focus on sustainability, long-term value and patient capital. And with many regulations currently focusing on the E of ESG, with social and governance taking something of a back seat, there’s scope for the UK to take the lead and adopt a truly holistic approach to ESG.

4.       Seeking to become the leading jurisdiction for technological innovation.

Innovation in areas such as distributed ledger technology and blockchain represent another key area of opportunity for the UK to take the lead internationally in terms of smart contracts and fund tokenisation, which can deliver efficiency and security for investors.

While it’s encouraging what has been seen so far, there’s still lots to do to make the UK stand out as a fund domicile of choice.