Part 4: Income tax, corporation tax and capital gains tax Section 43: Carried interest Details of the section Chapter 5 of TCGA 1992
Chapter 5 contains sections 103KA to 103KH which provide new rules for the taxation of carried interest which arises to individuals who provide investment management services.
	New section 103KA(1) sets out the circumstances in which the section applies. Several terms used have the same meaning as in the Income Tax Act (ITA) 2007 (see subsection (8) and new section 103KH).
	New section 103KA(3) applies when carried interest arises in any other circumstances. It provides that a chargeable gain accrues when the carried interest arises, and in an amount equal to the carried interest less similar specific deductions.
	New section 103KA(4) excludes certain amounts of carried interest from the chargeable gain which accrues. The exclusions are:
	Amounts brought into account in calculating A's profits from a trade, profession or vocation; and
	Amounts which constitute repayment of principal or return on a co-investment (see subsection (8)). In this context, a return will by definition be an arm's length return.
	New section 103KA(5) limits the deductions which are permitted in computing the chargeable gain which accrues. The permitted deductions are just and reasonable apportionments of amounts specified in subsection (6). The meaning of "just and reasonable" is not defined, but in order to be allowed as a deduction, an amount must be closely associated with the acquisition of the right to the carried interest which has arisen, or with the arising of the carried interest itself.
	New section 103KA(6) specifies the only amounts all or part of which may be permitted deductions in computing the chargeable gains mentioned in subsections (2) and (3). These are:
	Money (but not money's worth) given to the investment scheme by the individual for being admitted into the arrangements under which the individual provides management services. Money given for co-investments (see subsection (8)) is excluded (under section 103KA(6)(a));
	Amounts which have been taxed as income on the individual when he or she acquired the right to the carried interest by entering into the arrangements. Amounts treated as earnings in respect of co-investments and "exempt income" within section 8 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 are excluded (under section 103KA(6)(b)); and
	Other amounts which have been taxed as income on the individual in connection with his or her participation in the arrangements under which the individual provides management services and the carried interest arises, up to the time it arises (under section 103KA(6)(c)).
	New section 103KA(7) applies when carried interest arises to an individual who acquired the right to it from another person. In these cases, the person to whom the carried interest ultimately arises may make a claim to HM Revenue & Customs (HMRC) for their gain to be reduced by an amount equal to the money they gave as consideration for the right. No deduction is due automatically: a claim must be made and the normal rules which govern time limits, the method by which the claim is made and the other relevant conditions also apply.
	New section 103KA(8) defines terms used elsewhere in section 103KA. In order to be a "co-investment" an investment must yield a return which is an arm's length return, and no other. "Arm's length return" is defined in section 809EZB(2) of ITA 2007.
	New section 103KB applies when an individual disposes of his or her right to carried interest, either by selling it, surrendering it, allowing it to lapse or in any other way apart from the carried interest actually arising. It also applies if the right is varied without being disposed of. Consideration receivable for the disposal etc. is treated as carried interest in the hands of the recipient arising at the time of the disposal etc., whatever form that consideration takes and whenever it is actually received. However, this rule does not apply if the consideration is a disguised fee for the purposes of the disguised management fee rules in section 809EZA of ITA 2007.
	New section 103KC is relevant where the individual to whom the gain arises is taxed on the remittance basis. There will be a foreign chargeable gain if any of the management services performed under the arrangements under which the carried interest arises were performed outside the United Kingdom. In these cases, the chargeable gain which accrues under section 103KA(2) or (3) is apportioned by reference to the services performed outside the UK expressed as a fraction of all the services the individual performed. This applies instead of the normal rule at section 12(4) TCGA 1992, and the remittance basis rules apply to foreign chargeable gains determined under this rule, as they apply to foreign chargeable gains determined under section 12(4) TCGA 1992.
	New section 103KD is an anti-avoidance rule. It applies where there are arrangements which are intended to ensure that the rules in section 103KA do not apply to an individual or individuals, or to the whole of an amount of carried interest arising to an individual, where they would otherwise apply.
	New section 103KE is a general rule to ensure that any gain charged as a result of section 103KA is not actually or effectively taxed a second time on the same individual or on another person.
	New section 103KE (1)-(7) provide that where there is such a double charge, and tax other than capital gains tax charged by virtue of section 103KA has actually been paid by the individual to whom the carried interest arose, that individual may make a claim to HMRC to eliminate the double charge. The claim must be for adjustment of the capital gains tax charged, and HMRC will make just and reasonable adjustments which do not exceed the lesser of the capital gains tax charged under section 103KA and the amount of 'other' tax. Other tax charges which arise before the capital gains tax charge will generally be deductible under section 103KA(5): this section applies principally where other tax charges arise after that time.
	New section 103KE(8) allows an individual to elect for relief under this section to take precedence over the set-off of allowable losses brought forward against gains of the year. This ensures that losses brought forward are not 'wasted' in reducing CGT payable where a claim to relief under this section would have the same effect.
	New section 103KF is concerned with the position of external investors in the fund who may be affected by what is known as the 'base cost shift'. When part of the allowable cost of investment assets is transferred from investors to managers (base cost shift) the chargeable gains which will accrue to the investors on a disposal increases (or their losses are reduced). This may increase their tax payable. This section 103KF ensures that where the increase in base cost is effectively disallowed in the tax computation of the fund manager, the amount of the adjustment is effectively allowed as a deduction in the hands of the investor who transferred that base cost to the fund manager.
	New section 103KG deals with the question of when carried interest arises for the purposes of the chargeable gains legislation.
	Subsection (1) aligns the meaning of 'arises' with that used for the purposes of Chapter 5E of Part 13 of ITA 2007. However:
	Subsection (2) makes this general rule subject to certain exceptions where 'deferred carried interest' is concerned.
	Subsection (3) defines 'deferred carried interest'. Typically, it is carried interest that has been allocated to a fund manager but which cannot be released to him or her at the at time because further conditions need to be met, for example for regulatory purposes or to better align incentives for managers with the interests of investors.
	Subsection (4) provides that a sum 'arises' for tax purposes when it ceases to be deferred carried interest (for instance, when any of the necessary conditions in subsection (2) cease to be met). This is subject to subsection (5), which provides that a sum does not however 'arise' if the 'enjoyment' conditions are not met and there is no reasonable likelihood that they will be met.
	Subsection (6) sets out the 'enjoyment conditions' mentioned in subsection (5). These are broadly similar to those which apply in relation to investment management fees for income tax purposes. Subsections (7) to (9) provide further rules as to when the enjoyment conditions are, or are not, met.
	Subsections (10) and (11) introduce an anti-avoidance rule to ensure that arrangements with a main purpose of avoiding tax cannot be used to ensure that the enjoyment conditions are treated as not being met.
	Subsections (12) to (14) introduce an anti-avoidance rule to ensure that arrangements are not put in place to take advantage of the deferral conditions.
	Subsection (15) imports the definition of 'connected' from section 993 of ITA 2007, with certain adaptations. This definition applies, rather than the definition at section 286 TCGA 1992.
	New section 103KH subsection (1) gives the meaning of certain words and phrases used in sections 103KA to 103KG.
	Subsection (2) specifies that the rules in sections 103KA to 103KH have effect in relation to any carried interest that arises on or after 8 July 2015, unless that carried interest is derived from a disposal of partnership assets which took place before that date. This is subject to the special rules at subsections (3) and (4).
	Subsection (3) provides that section 103KB( 1) does not apply to variations of a right to receive carried interest which take place on or after 8 July and before 22 October 2015.
	Subsection (4) provides that the modifications to the general meaning of 'arises' at section 103KG (2) to (15) apply to carried interest arising on or after 22 October 2015 (unless it arises in connection with a disposal of partnership assets before that date).
	Subsection (5) ensures that for the purposes of the commencement provision in subsection (2), carried interest and other terms have the same meaning as they do in Chapter 5 of Part 3 of TCGA 1992.