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Opportunities for fund managers with two new UK reforms

09 May 2022

From this April, there are attractive opportunities for fund managers (particularly UK-based ones) with the UK government implementing two reforms that enhance the UK’s attractiveness as a location for asset management.

Qualified asset holding companies (QAHCs)

Fund managers have commonly adopted EU (primarily Luxembourg) holding companies, but this needs to be reviewed given the EU Project “Unshell” requirements for greater substance. UK managers may therefore prefer the safer option of QAHCs based on their UK operations: the robust solution of the UK as a single jurisdiction for their combined fund and QAHC operations.

QAHCs are attractive for holding non-UK real estate as there are significant tax benefits, including the exemption of capital gains (including gains on qualifying shares), on non-UK real estate and profits of a non-UK real estate business where those profits are subject to tax in a non-UK jurisdiction. An eligibility criterion is that the QAHCs need to be at least 70% owned by diversely owned funds, or pension funds and certain other institutional investors.

Real estate investment trusts (REITs)

UK REITs can now be unlisted, provided institutional investors hold at least 70% of the ordinary share capital in the REIT. REITs are tax exempt on profits (both income and capital gains) arising from carrying on a qualifying property rental business. Investors’ tax liability replicates the scenario as if the investors hold investments direct, that is, treated as property income distribution (PID), subject to withholding tax of 20% or (with international investors) it may effectively be lower under applicable double tax treaties.

In addition, the definition of the “holder of excessive rights” (HoER) tax charge has changed. REITs are no longer subject to the HoER penalty charge (that applies to distributions to a company or body corporate that is beneficially entitled to 10% or more of the REIT’s distributions or share capital, or controls 10% or more of its voting rights) where PIDs are paid to shareholders entitled to gross payment like UK corporates. This avoids the need for those investors to fragment their interest.

Why are the reforms attractive?

Both reforms could be particularly attractive for UK pension funds and other tax-exempt institutional investors. For instance, QAHCs avoid the “Unshell” risk and REITs facilitate diversified returns via a UK corporate structure that does not incur a UK corporation tax trap, which is significant with the tax rate increasing to 25% from April 2023. This is also attractive for international investors as in most cases the withholding tax obligation on the annual REIT distribution (taking into account double tax treaties) will be typically reduced to 15%; a 10% differential when compared to the 25% corporation tax rate.

In addition, the REIT now has the flexibility to operate as a tax efficient joint venture or “club” that competes with offshore alternatives. Managers are encouraged to explore these transformative reforms as the UK reinforces its global leadership as a funds centre of excellence.


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