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The UK Qualifying Asset Holding Company Regime – New HMRC Guidance Clarifies Application of Activity Condition to Credit Funds

HMRC has recently updated its guidance on the UK’s new qualifying asset holding company (QAHC) tax regime, which was introduced from 1 April 2022, to include examples of the application of the QAHC regime “activity condition” to credit funds (i.e. the requirement for a QAHC to carry out mainly investment business, with any other activity, such as trading, being ancillary to it and not carried on to any substantial extent). The new guidance should provide a good degree of comfort to asset managers that are considering using UK QAHCs within their credit fund structures as an alternative to, for example, Luxembourg and Irish vehicles traditionally used by private debt and loan origination funds.


As set out in our previous alert published in April 2022, where a company is engaged in any trading activity, it will not be eligible for the QAHC regime unless that trade is merely ancillary to the main investment business and is not substantial (known as the “activity condition”). As noted in our summary, at the time the regime came into effect, in the absence of specific HMRC guidance on the point, there was some uncertainty as to whether credit funds which engage in loan origination and/or other activities related to debt might be considered to be trading, and also as to whether any fees they receive in connection with their main lending activities (such as origination, participation, documentation or consent fees) might be considered to be trading income. If either the basic activity were considered trading, or the fees received were treated as trading income that was more than insubstantial in the context of the company’s activities as a whole, then the activity condition would not be met and the QAHC regime would not be available. Such an outcome could potentially mean that a significant number of credit funds could not use the QAHC regime, undermining one of the policy objectives of the regime of making the UK an attractive jurisdiction for credit funds to establish vehicles.

HMRC’s new guidance

HMRC has now updated its guidance on the QAHC regime at IFM40260. Intended to supplement existing HMRC guidance on the meaning of “trade” set out in the Business Income Manual, the new guidance, broadly speaking, gives comfort that loan origination is not in itself indicative of trading and that, where loans are originated with the intention of being held on a medium to long term basis as part of a company’s investment strategy, it is likely that this will be part of its (main) investment business.

With respect to fees, the guidance states that income generated by originating and holding loans, including participation, origination and execution fees, are likely to be investment income and simply part of the main investment business if the lending itself is an investment activity. However, fees received for arranging loans for others, such as syndication fees, might well be trading income arising from a business activity separate to any investment business that might also be carried on by the company. The guidance states that the quantum of syndication fees received compared to the other investment returns of the company is likely indicative of both whether the syndication activity is ancillary to this investment business and whether it is carried on to a substantial extent.

Similarly, with regard to the acquisition of distressed debt, the new guidance provides that, where such assets are acquired with the intention of being held for the medium to long term, this is likely to constitute investment activity, even where opportunities are taken to sell down the debt rather than hold it to maturity. However, a greater level of activity in relation to distressed assets, such as leading a restructuring or insolvency process (where other investors simply participate), might amount to a trade. Whether such activity results in a trade may depend on whether the company holds a significant position that gives it a better position than other creditors to lead the process. The receipt of fees for carrying out such activity may indicate trading, particularly where these fees are not ancillary to the main investment activity.


The new guidance provides welcome clarification of HMRC’s interpretation of how the QAHC legislation should apply to common lending/debt acquisition activities, which should provide a good degree of comfort to asset managers who are considering using QAHCs within their credit fund structures as an alternative to, for example, the Luxembourg and Irish vehicles traditionally used by private debt and loan origination funds. However, there are no “bright line” tests, and a case-by-case assessment as to whether a given debt or loan origination strategy is or is not going to be an allowable investment activity under the QAHC regime will still be necessary.

If you have any questions about the Qualifying Asset Holding Company regime please contact Peita Menon or Paul Harrington.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.