Additional comment and conclusion

The QAHC Tax Proposals are far reaching and should be examined very closely by Fund managers, especially those with management teams in the UK, with a mandate to target investors globally. However, Funds looking to target EU investors will struggle with a UK Fund and UK AIFM from an EU regulatory perspective.

Looking more closely at the QAHC Tax Proposals, some of the proposals have not yet been published in draft form, and once drafted, these will be examined closely to see how they impact Fund managers, especially the requirement for the manager to be “independent” from investors, although we understand that HMRC are conscious of existing set-ups whereby the Fund manager also has an in-house AIFM, and we anticipate that this requirement will be satisfied for most Sponsors.

More generally, HM Treasury has taken into consideration a number of opinions of key stakeholders (including as outlined in our submissions to HM Treasury), to create a regime that is easy for Fund managers to understand and implement. In particular, we were concerned with a more limited capital gains tax exemption that taxed UK investors, through complex tax deferral and tracking mechanisms. Fortunately, the proposal adopted by HM Treasury is to provide a very broad participation exemption on capital gains tax, on disposals of shares and overseas real estate (but not UK real estate, which was always expected to be the case). Similarly, a blanket withholding tax exemption on interest payments to investors now means that a QAHC is not subject to either interest or dividend WHT when repatriating profits to investors. It should also be relatively easy to use profit participating loans without incurring increased tax leakage at the level of the QAHC, and if needed share buybacks, to repatriate profits to investors without these being treated as an income distribution in the hands of UK investors.

To the extent that the Carry partnership holds interests in the QAHC direct, typically this would be expected to fall within the 30% threshold for non-qualifying investors (there are special rules to look at the maximum proportion of returns the carry holders could receive over the life of the Fund), as carry entitlements usually provide for a maximum 20% of all Fund returns in any event. It may be preferable however for the Carry partnership to be a limited partner in the Fund partnership instead, in order to preserve the 30% allowance for non-qualifying investors holding interests in the QAHC direct.

From a tax perspective, under the new regime, arguably a QAHC is in many respects equal to, and in some instances more tax friendly, than existing Fund friendly regimes such as Luxembourg (although the remaining draft legislation is yet to be published).

From a regulatory perspective, post-Brexit, it is very challenging for a UK AIFM to market to a large number of EU investors, across a number of EU member states. It difficult from a compliance perspective and also expensive to rely on the National Private Placement Regime, and becoming increasingly difficult in practice to be able to benefit from ‘reverse solicitation’, in particular noting that the European Securities & Markets Authority is looking at this exclusion very closely. Therefore, a Fund marketing to EU investors would generally look to use an EU AIFM from a regulatory perspective.

The UK VAT position on management fees also requires additional consideration. HM Treasury is closely examining proposals to widen the VAT exemption for fund management services which would provide certainty to Fund managers and would put the UK on a level playing field with other regimes such as Luxembourg.

At the same time, given that the UK tax position has greatly improved pursuant to the QAHC Tax Proposals, a UK management team with its own UK AIFM looking to launch a UK or global Fund, with a relatively small percentage of EU investors, should think very closely about establishing a UK Fund and incorporating a UK QAHC to hold the underlying investments.

Exciting times are ahead for the UK Funds industry!