UK asset holding companies for credit funds

By Mark Boyle; Darrin Henderson; Clare Eagle; Dale Smith, EY, UK

Published: 28 June 2021


At Spring Budget 2020, the government announced an initial consultation on the tax treatment of asset holding companies (AHCs) in alternative fund structures.

The government published its response to the consultation in December 2020 and announced a second-stage consultation which concluded in February 2021. In parallel with this the government launched a wider non-tax-specific review of the UK funds regime in January 2021 and is also expected to take forward a review of the VAT treatment of fund management fees during 2021.

The launch of these consultations provides a strong indication of the direction of travel of UK government policy surrounding the asset management and funds industry. This article discusses the possible tax features of a UK AHC regime, with a focus on the issues of most relevance to the credit fund industry.

To date, asset-holding SPVs within credit fund structures have generally been located in jurisdictions which tax the SPVs on a margin commensurate with the role performed in aggregating investment profits and returning this to investors. However, under current UK rules, tax deductions for distributions are typically limited where results vary depending on the performance of the underlying investments. Consequently, it can be difficult for investors to generate returns linked to the performance of an underlying investment in a tax-efficient manner where such investments are held by a UK entity.

What could the future of UK fund taxation look like?

In response to the initial AHC consultation, the government has confirmed there is a clear case to introduce a new and bespoke tax regime for AHCs, rather than by making general changes to the UK tax system. The regime is expected to be elective in nature, and subject to eligibility requirements.

Substantial progress has been made with the public consultation process on the AHC regime to date, with draft legislation expected during 2021, followed by a technical consultation period ahead of its inclusion in the next Finance Bill. We outline below some of the key pressure points associated with an AHC regime which have been identified by the government in response to the consultation to date.

What could a new AHC regime look like?

In the Government’s responses to the initial AHC consultation, three features were outlined as being key for a new AHC regime:

  1. Robust eligibility criteria to limit access to intended users (i.e., investing funds rather than corporate groups)
  2. The AHC being a taxable entity, and liable to UK corporation tax to a degree commensurate with its role
  3. Rules to ensure UK investors are taxed on income and gains received from an AHC broadly as if they had invested in the underlying assets directly

We consider below how such goals may be achieved in practice.

  1. Eligibility


The AHC regime is expected to focus on structures which facilitate pooling of capital from either multiple unconnected investors, or institutional investors acting as an investment channel for others. However, the rules should also accommodate situations where investments are made by strategic co-investment partners or indirectly via special purpose vehicles.

The regime may require that either an AHC is owned by a vehicle which itself falls within an already well-defined fund regime for UK regulatory purposes (e.g. a collective investment scheme (CIS) or alternative investment fund (AIF)), or alternatively, there may be requirements such that an AHC is not itself controlled by a small number of non-institutional investors, via some form of ‘non-close’ test. Alternatively it has been suggested that the regime could leverage the definition of ‘excluded entities’ within the OECD Base Erosion and Profit Shifting (BEPS) 2.0 Report on Pillar Two Blueprint.


To be eligible for the AHC regime, assets held by an AHC may be required to be managed by an independent investment manager, authorised to undertake asset management and subject to supervision in its jurisdiction. The definition of ‘independent’ may draw on regulatory concepts or tax definitions (e.g. the independent capacity definition used for the investment manager exemption (IME)).

Character and activities

The required activity of an AHC will likely be to enable investors to participate in or receive profits or income arising from the acquisition, holding, management or disposal of certain investment assets. The Government note that definitions for such character and activities may be derived from established regulatory or tax definitions.

Additional characteristics of an AHC may include a minimum capital requirement, or a well-defined investment policy and practice of reinvesting or returning capital to participants when assets are sold.

  1. Taxation of AHCs

The UK government have confirmed that AHCs will be subject to UK corporation tax via a specific regime, and that the taxation of an AHC should be commensurate with the activities it performs in facilitating the flow of income and capital between investors and investment assets. A successful AHC regime should therefore result in an AHC being taxed on a profit margin, with investors not being materially disadvantaged by indirectly investing in assets via an AHC rather than doing so directly.

The government has set out several possible approaches to achieving this goal.

Deductions for payments to investors

As noted above, under current UK tax rules, deductions on distributions are typically limited where results vary depending on the performance of the underlying investment portfolio. Therefore, where distributions to investors are linked to the performance of underlying assets, an AHC could suffer taxation on significant profits in a period where investments have performed well.

To address this issue, the AHC regime may allow AHCs to obtain tax deductions for interest payments on results-dependent debt. Alternatively, it may permit tax deductions as expenses for any amounts returned to investors, regardless of the method of return.

Transfer pricing

An AHC should not be able to obtain relief for payments to investors that would reduce its profit below an amount commensurate with its role. This could be achieved by ensuring transfer pricing rules apply to tax an AHC in line with the complexity of its operations.

Withholding taxes (WHT)

Under current tax rules, payments of UK-sourced yearly interest to non-residents are generally, absent the availability of any domestic or treaty reliefs, subject to WHT at 20%. While overseas funds can generally claim relief, the Government recognises that this can be administratively cumbersome.

As such, the second stage AHC consultation considers whether a bespoke WHT exemption for AHCs making interest payments may be appropriate. Such an exemption would likely need to be supported by some form of main purpose test or qualifying territories list, to avoid artificial diversion of investment income to low-tax territories.

  1. Taxation of UK investors

Under the AHC regime, UK investors in an AHC should be taxed on amounts received from an AHC in accordance with the character of the underlying income (or gain).

If an AHC has obtained relief against taxable income in respect of payments to UK investors, the regime should include rules to ensure such amounts are taxable as income (not capital) in the hands of the UK investors. These rules should also include specific overrides to ensure amounts treated as interest in the hands of UK investors are taxed as income, even where the payment made may be classed as a distribution at the AHC level.

The government also notes in the second-round consultation that distributions to UK investors associated with assets within the loan relationship rules will be considered as income, even where such amounts arguably have a capital component.


Non-domiciled UK residents (non-doms) generally do not pay tax on foreign income or gains unless they are remitted into the UK. The government acknowledges that absent any specific rule, investments in a UK AHC by a non-dom may represent a remittance. To ensure an AHC is also attractive to non-doms, the regime should be drafted so that an AHC falls outside the remittance legislation.

Implications for asset management groups

2021 will be an important year for asset managers and funds, with responses to the UK funds regime review expected later in the year, draft legislation associated with ongoing consultations to be included in the Finance Bill and a commitment from the Government to take forward a review of the VAT treatment of fund management fees.

The global tax environment is evolving, and conditions associated with beneficial ownership, economic substance and purpose are often key requirements to the success of any claim for withholding tax or capital gains relief under many double tax treaties. The presence in the UK of a developed financial services infrastructure, expertise in portfolio management, and a well-defined regulatory and legal framework mean that going forward it may increasingly be viewed as an appropriate jurisdiction for the location of AHCs in terms of commercial purpose and substance.

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Member firms of the global EY organisation cannot accept responsibility for loss to any person relying on this article.