28/10/21

UK: Government to entice real estate fund managers to bring overseas assets onshore.

As published on realassets.ipe.com, Thursday 28 October, 2021.

The UK government has produced draft legislation which could make it more attractive for UK-based real estate fund managers to move away from holding overseas property assets offshore.

The draft rules on asset holding companies (AHCs) are to take effect in April next year and include certain capital-gains exemptions that could entice managers of alternatives funds to move their AHCs to the UK.

Pan-European real estate funds sponsored by UK-based managers, for instance, tend to hold assets in a Luxembourg-based AHC, but some experts believe this common practice could be challenged by the planned reform.

The new UK qualifying asset holding companies (QAHCs) must be at least 70% owned by diversely-owned funds, or “certain institutional investors”. The government also announced a consultation on introducing a re-domiciliation regime with the intention of making it easier to move foreign-incorporated companies to the UK.

Irfan Butt, partner in the London corporate tax team at RSM, said the regime “is a real game changer for the UK as a holding company location” and will be “attractive for a range of investments including investment in non-UK real estate.”

He added: “The regime will be not available for UK property investments, but institutional investors can use other structures to achieve the same tax-efficiency to invest in UK real estate. The introduction of the regime certainly puts the UK as an attractive holding-company jurisdiction, thereby strengthening and creating more jobs in the funds and financial services sectors.”

Key features of the regime include exemption from capital gains on sale of certain shares and overseas property and interest deductions for profit participating loans, he said. The addition of no withholding tax to apply on interest payments by AHCs will put the UK “on a par with other jurisdictions”, including Luxembourg.

Earlier this month, Melville Rodrigues, head of real estate advisory at Apex Group, raised the question of whether UK alternative fund managers operating AHCs in the EU would repatriate their AHCs to the UK under government plans for reform.

Writing in IPE Real Assets, he said: “For many UK managers, the pendulum had swung to EU locations, often Luxembourg and Ireland, as AHC jurisdictions of choice, given their straightforward solutions in addressing the challenges… However, UK managers’ decisions may be dominated in the future by more stringent EU substance requirements, which result in the pendulum swinging towards the UK QAHCs.”

Following yesterday’s announcement by the government, Rodrigues reaffirmed his expectation that “we could well experience asset holding companies in UK alternative funds coming home”.

He added: “The companies have been typically located in Luxembourg. Fund managers may prefer the robust solution of the UK as a single jurisdiction for their combined fund and AHC operations, and also avoid the substance scrutiny and risks to their fund structures on account of EU planned legislation [designed to tackle the abusive use of shell companies].”

The latest newsletter from John Forbes Consulting, which advises real estate managers and investors in the UK, said: “The creation of a viable UK holding company regime at the same time that the EU is moving forward rapidly with further requirements for substance for tax purposes (expected imminently) might make the UK a genuine challenger to Luxembourg… this is part of a broader initiative to make the UK asset management industry more competitive.”

Stephen Palmer, director at DTZ Investors in the UK, said: “As ever, it looks as if there will be a trade-off for UK based-managers to consider… the tax efficiencies and familiarity of EU-domiciled holding company structures will need to be weighed up against substance requirements – and associated costs.

“In this context, UK domiciled QAHCs may appeal to some as these promise relative administrative ease and a known regulatory framework.”