On 15 December 2020, HM Treasury published a second stage consultation concerning the taxation of asset holding companies (AHCs) in alternative fund structures. AHCs are companies used as intermediate entities in investment fund structures. Their role is to facilitate the flow of capital, income and gains between investors and underlying investments. In addition, the Government also seeks views on targeted changes to the REIT regime. Such targeted changes include amendments in the following areas:

• Listing requirement. The Government recognises that the requirement to be listed or traded on a recognised stock exchange can create unnecessary and costly administrative burdens in some circumstances, such as where a REIT is wholly owned by institutional investors. The Government is considering relaxing this requirement where the institutional investors are themselves widely held, and welcomes views on the scope of the relaxation and where the boundary should be drawn.
• Institutional investors and close company requirement. The rules on the close company requirement were relaxed in 2012, so that a close company could enter the REIT regime where it is close only because it has an institutional investor as a participator. The Government intends to explore further the following areas: whether further investor types should be added to the list of institutional investors, should the rule for an overseas equivalent of a UK REIT be modified so that it suffices that the overseas entity would qualify as a UK REIT were it to be UK resident and whether when considering a look through approach as part of the close company test, should this work in a similar way to the Non-resident Capital Gains Tax rules.
• Holders of excessive rights rule. The Government is considering relaxing this rule so that it would apply only on distributions to entities where withholding tax would be required, resulting in no tax charge under this rule where the recipient is entitled to receive distributions gross. The rule would still be required for other investors to ensure that property income is taxed appropriately.
• The balance of business test. The Government will consider how the test can be reformed to provide greater certainty.

The second stage consultation will run from 15 December 2020 to 23 February 2021. Draft legislation will then be published during 2021, allowing for a period of technical consultation ahead of its inclusion in the Finance Bill.