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Tax treatment of AHCs in alternative fund structures (first stage consultation) – Law Society response

The proposals

HM Treasury held a consultation to improve the government’s understanding of fund structures and the use of asset holding companies (AHCs) within them.

The consultation explored:

  • the barriers that the UK tax system might be creating for the establishment of these companies in the UK
  • the merits of taking steps to remove those barriers
  • the different options for doing so

It's one of the first steps of a wider review of the UK funds regime announced in the 2020 spring Budget.

Our view

Our response sets out some of the reasons that AHCs are used in fund structures.

It explains that tax reform to increase the attractiveness of establishing AHCs in the UK could bring economic benefits, but to do so it would need to go far enough to affect decisions.

Certainty and neutrality of tax treatment would be important features of a more attractive tax regime for AHCs.

In other words, investors would want to be sufficiently confident that the interposition of the AHC will not leave them in a worse position than if they had invested directly in the underlying assets.

We highlighted tax issues that can affect the tax neutrality of AHCs (including issues that arise in respect of certain common fund asset classes) and proposed potential solutions to those issues.

The more important issues include:

  • the interest deductibility rules
  • withholding taxes
  • the taxation of income and gains on real estate and shares held by the AHC
  • the controlled foreign company rules
  • the anti-hybrid rules

What this means for solicitors

The UK asset management industry is a significant employer in the UK and a world leader in the sector.

Many of our members are involved in advising asset managers making and managing investments in alternative assets on tax and other issues.

As such, many of our members are frequently called upon to advise on the issues covered by this consultation and have an interest in a well-functioning UK funds regime.

Next steps

This consultation closed on 19 August.

The consultation paper states that the government will decide on the merits of action, and if relevant, the legislative timetable, after the consultation process.

Further detail on the wider review of the funds regime is expected in due course.

Read the consultation on the GOV.UK website