Taxation of Chargeable Gains Act 1992 (c. 12)

Part III U.K. Individuals, partnerships, trusts and collective investment schemes [F1 etc]

Textual Amendments

F1 Word in Pt. 3 heading inserted (with effect in accordance with Sch. 22 para. 12 of the amending Act) by Finance Act 2009 (c. 10), Sch. 22 para. 9; S.I. 2010/670, art. 2

[F2 Chapter 5 U.K. Carried interest

Textual Amendments

F2 Pt. 3 Ch. 5 inserted (with effect in accordance with s. 43(2)-(4) of the amending Act) by Finance (No. 2) Act 2015 (c. 33), s. 43(1)

103KA Carried interest U.K.

(1) This section applies where—

(a) an individual (“A”) performs investment management services directly or indirectly in respect of an investment scheme under arrangements involving at least one partnership, and

(b) carried interest arises to A under the arrangements.

(2) If the carried interest arises to A in connection with the disposal of one or more assets of the partnership or partnerships—

(a) a chargeable gain equal to the amount of the carried interest less any permitted deductions (and no other chargeable gain or loss) is to be treated as accruing to A on the disposal, and

(b) the chargeable gain is to be treated as accruing to A at the time the carried interest arises.

(3) If the carried interest arises to A in circumstances other than those specified in subsection (2), a chargeable gain of an amount equal to the amount of the carried interest less any permitted deductions is to be treated as accruing to A at the time the carried interest arises.

(4) Subsections (2) and (3) do not apply in relation to carried interest to the extent that—

(a) it is brought into account in calculating the profits of a trade of A for the purposes of income tax for any tax year, or

(b) it constitutes a co-investment repayment or return.

(5) For the purpose of subsections (2) and (3) “permitted deductions” in relation to A means such parts of the amounts specified in subsection (6) as is just and reasonable.

(6) The amounts referred to in subsection (5) are—

(a) the amount of any consideration in money given to the scheme by or on behalf of A wholly and exclusively for entering into the arrangements referred to in subsection (1)(a) (but not consideration in respect of co-investments),

(b) any amount that constituted earnings of A under Chapter 1 of Part 3 of ITEPA 2003 (earnings) in respect of A's entering into those arrangements (but not any earnings in respect of co-investments or any amount of exempt income within the meaning of section 8 of that Act), and

(c) any amount which, by reason of events occurring no later than the time the carried interest arises, counts as income of A under the enactments referred to in section 119A(3) in respect of A's participation in the arrangements referred to in subsection (1)(a) (but not an amount counting as income of A in respect of co-investments); and section 119A(5) applies for the purposes of this paragraph as it applies for the purposes of section 119A(4).

For the purposes of this Act no other deduction may be made from the amount of the carried interest referred to in subsection (2) or (3).

(7) Where the carried interest arises to A by virtue of his or her acquisition of a right to it from another person for consideration given in money by or on behalf of A, the amount of the chargeable gain accruing to A under subsection (2) or (3) is, on the making of a claim by A under this subsection, to be regarded as reduced by the amount of the consideration.

(8) In this section—

• “co-investment”, in relation to A, means an investment made directly or indirectly by A in the scheme, where there is no return on the investment which is not an arm's length return within the meaning of section 809EZB(2) of ITA 2007;

• “co-investment repayment or return” means a repayment in whole or in part of, or a return on, a co-investment;

• “trade” includes profession or vocation.

103KB Carried interest: consideration on disposal etc of right U.K.

(1) For the purposes of section 103KA, consideration received or receivable by an individual for the disposal, variation, loss or cancellation of a right to carried interest is to be treated as carried interest arising to that individual at the time of the disposal, variation, loss or cancellation.

(2) But subsection (1) does not apply if and to the extent that the consideration is a disguised fee arising to the individual for the purposes of section 809EZA of ITA 2007.

103KC Carried interest: foreign chargeable gains U.K.

In a case where section 103KA applies, a chargeable gain accruing or treated as accruing to an individual in respect of carried interest is [F3 a chargeable gain accruing on the disposal of an asset situated outside the United Kingdom] only to the extent that the individual performs the services referred to in section 103KA(1)(a) outside the United Kingdom.

Textual Amendments

F3 Words in s. 103KC substituted (with effect in accordance with Sch. 1 paras. 120, 123 of the amending Act) by Finance Act 2019 (c. 1), Sch. 1 para. 47

103KD Carried interest: anti-avoidance U.K.

In determining whether section 103KA applies in relation to an individual, no regard is to be had to any arrangements the main purpose, or one of the main purposes, of which is to secure that that section does not to any extent apply in relation to—

(a) the individual, or

(b) the individual and one or more other individuals.

103KE Carried interest: avoidance of double taxation U.K.

(1) This section applies where—

(a) capital gains tax is charged on an individual by virtue of section 103KA in respect of any carried interest, and

(b) Condition A or Condition B is met.

(2) Condition A is that—

(a) at any time, tax (whether income tax or another tax) charged on the individual in relation to the carried interest has been paid by the individual (and has not been repaid), and

(b) the amount on which tax is charged as specified in subsection (1)(a) is not a permissible deduction under section 103KA(6)(b) or (c).

(3) Condition B is that at any time tax (whether income tax or another tax) charged on another person in relation to the carried interest has been paid by that other person (and has not been repaid).

(4) In order to avoid a double charge to tax, the individual may make a claim for one or more consequential adjustments to be made in respect of the capital gains tax charged as mentioned in subsection (1)(a).

(5) On a claim under this section an officer of Revenue and Customs must make such of the consequential adjustments claimed (if any) as are just and reasonable.

(6) The value of any consequential adjustments made must not exceed the lesser of—

(a) the capital gains tax charged as mentioned in subsection (1)(a), and

(b) the tax charged as mentioned in subsection (2)(a) or (3).

(7) Consequential adjustments may be made—

(a) in respect of any period,

(b) by way of an assessment, the modification of an assessment, the amendment of a claim, or otherwise, and

(c) despite any time limit imposed by or under an enactment.

(8) Where—

(a) an individual makes a claim under this section in respect of a year of assessment, and

(b) apart from this subsection, an amount falls to be deducted under [F4 section 1(3)(b)] from the total amount of chargeable gains accruing to the individual in that year,

the individual may elect that the amount to be so deducted be reduced by any amount not exceeding the amount on which tax is charged as specified in subsection (2)(a) or (3).

Textual Amendments

F4 Words in s. 103KE(8)(b) substituted (with effect in accordance with Sch. 1 paras. 120, 123 of the amending Act) by Finance Act 2019 (c. 1), Sch. 1 para. 48

103KF Relief for external investors on disposal of partnership asset U.K.

(1) If—

(a) a chargeable gain accrues to an external investor in an investment scheme on the disposal of one or more partnership assets, and

(b) the external investor makes a claim for relief under this section,

then subsection (2) applies in relation to the disposal.

(2) The amount of the chargeable gain is to be reduced by an amount equal to—

where—

(a)

I is an amount equal to such part of the sum invested in the fund by the external investor which on a just and reasonable basis is referable to the asset or assets disposed of, and

(b)

C is the amount deducted under section 38(1)(a) in respect of consideration given wholly and exclusively for the acquisition of the asset or assets.

[F5 103KFA Election for carried interest gains to be chargeable as scheme profits arise U.K.

(1) An individual (“A”) may make an election under this section in respect of an investment scheme (“the relevant scheme”) if—

(a) section 103KA applies in relation to A and the relevant scheme, or

(b) it is reasonable to expect that it will apply in relation to A and the relevant scheme.

(2) Subsection (3) applies for a tax year (“the relevant tax year”) where an election made under this section has effect for that tax year.

(3) A chargeable gain is deemed to arise to A in the relevant tax year and is to be treated as accruing to A immediately before the end of the relevant tax year.

(4) The amount of the gain is the amount given by reducing—

(a) the amount of carried interest that would arise to A in the relevant tax year in the circumstances mentioned in subsection (5), by

(b) the sum of chargeable gains deemed to arise to A under this section in respect of the relevant scheme in previous tax years.

(5) Those circumstances are that—

(a) all of the investments held by the relevant scheme in the relevant tax year, and previously held by the scheme, whose disposal would be relevant to A’s entitlement to carried interest, were disposed of in the relevant tax year,

(b) the amount realised on the disposal of each investment that was not actually disposed of in, or before, the relevant tax year were the amount of the costs to the relevant scheme in acquiring that investment,

(c) all income that was received by the scheme (whether before or during the relevant tax year) and that would be relevant to A’s entitlement to carried interest, were received in the relevant tax year, and

(d) all profits realised by the scheme as a result of those disposals and the receipt of that income were distributed to its investors in the relevant tax year.

(6) Where—

(a) distributions were made by the scheme to external investors before the relevant tax year, and

(b) the timing of those distributions affects the amount of carried interest that actually arises to A,

the amount of carried interest to be presumed to arise in the circumstances mentioned in subsection (5) is to reflect the fact those distributions were made before the relevant tax year.

(7) But if reflecting that fact would lead to a presumption that an amount of carried interest had arisen before the relevant tax year, any such amount is to be presumed to arise in the relevant tax year.

(8) A chargeable gain treated as accruing to an individual under subsection (3) is a chargeable gain accruing on the disposal of an asset situated outside the United Kingdom only to the extent that the individual performs investment management services in respect of the relevant scheme outside the United Kingdom.

(9) An election under this section—

(a) must be made by notice given to an officer of Revenue and Customs, and

(b) may not be revoked.

(10) A notice making an election—

(a) must state the first tax year for which it is to have effect, and

(b) may not be given after 31 January following the end of that tax year.

Textual Amendments

F5 Ss. 103KFA-103KFE inserted (with effect for the tax year 2022-23 and subsequent tax years) by Finance (No. 2) Act 2023 (c. 30), s. 42(2)(4)

103KFB Election in relation to scheme to apply to associated schemes U.K.

(1) Where an election has been made under section 103KFA in relation to an investment scheme (“S”) that is associated with another investment scheme, the election applies in respect of the other scheme (whether or not the conditions for an election to be made in respect of the other scheme were met at that time).

(2) “Associated”, in relation to two or more investments schemes, is to be construed in accordance with section 809FZZ of ITA 2007.

Textual Amendments

F5 Ss. 103KFA-103KFE inserted (with effect for the tax year 2022-23 and subsequent tax years) by Finance (No. 2) Act 2023 (c. 30), s. 42(2)(4)

103KFC Interaction with other charges U.K.

(1) The accrual of a chargeable gain treated as accruing to an individual under section 103KFA(3) does not prevent the individual or any other person being charged to tax (whether income tax, capital gains tax or any other tax, and including as a result of section 103KA) in relation to carried interest that arises to the individual under arrangements with the relevant scheme.

(2) But subsection (3) applies where an individual—

(a) has made an election under section 103KFA,

(b) has accrued a chargeable gain treated as accruing under section 103KFA(3),

(c) has paid (and has not been repaid) an amount of capital gains tax that is attributable to that chargeable gain, and

(d) is charged to tax (whether income tax, capital gains tax or another tax) in relation to carried interest that—

(i) arises to the individual under arrangements with the relevant scheme, and

(ii) arises in or after the tax year in which a gain first accrued under that section.

(3) The individual may make a claim for one or more consequential adjustments to be made reducing the tax mentioned in subsection (2)(d).

(4) On a claim under subsection (3) an officer of Revenue and Customs must make such of the consequential adjustments claimed (if any) as are just and reasonable.

(5) The value of any consequential adjustments made must not exceed the lesser of—

(a) the amount of capital gains tax paid as mentioned in subsection (2)(c), and

(b) the tax charged as mentioned in subsection (2)(d).

(6) Consequential adjustments may be made—

(a) in respect of any period, and

(b) by way of an assessment, the modification of an assessment, the amendment of a claim, or otherwise.

(7) No claim may be made under section 103KE (carried interest: avoidance of double taxation) in respect of tax charged as a result of the accrual of a chargeable gain treated as accruing to an individual under section 103KFA(3).

Textual Amendments

F5 Ss. 103KFA-103KFE inserted (with effect for the tax year 2022-23 and subsequent tax years) by Finance (No. 2) Act 2023 (c. 30), s. 42(2)(4)

103KFD Deemed accrual of loss where carried interest never arises U.K.

(1) Subsection (3) applies where—

(a) an individual has made an election under section 103KFA,

(b) the individual has accrued a chargeable gain treated as accruing under section 103KFA(3), and

(c) the conditions in subsection (2) are met.

(2) Those conditions are that—

(a) all, or substantially all, of the investments of the relevant scheme have been disposed of,

(b) the amount of carried interest that has arisen to the individual in respect of the relevant scheme since the beginning of the first tax year in which a gain is treated as accruing under section 103KFA(3) is less than the sum of chargeable gains treated as accruing to the individual under that section, and

(c) no further amount of carried interest can reasonably be expected to arise to the individual under arrangements with the relevant scheme.

(3) The individual is to be treated as accruing a loss immediately before the end of the tax year in which the conditions in subsection (2) are first met.

(4) The amount of that loss is the amount given by subtracting—

(a) the amount of carried interest that arose to the individual in respect of the relevant scheme since the beginning of the first tax year in which a gain is treated as accruing under section 103KFA(3), from

(b) the sum of the chargeable gains that have accrued under section 103KFA(3) (including any gain that accrues in respect of the tax year in which the loss accrues).

(5) Where a loss has accrued to an individual as a result of subsection (3)—

(a) section 103KFA (3) does not apply (in relation to the individual and the relevant scheme) for any tax year after the tax year in which the loss accrued, and

(b) if carried interest arises to the individual in respect of the relevant scheme after the loss accrued, the individual may not make a claim under section 103KFC(3) in respect of tax charged in relation to it.

Textual Amendments

F5 Ss. 103KFA-103KFE inserted (with effect for the tax year 2022-23 and subsequent tax years) by Finance (No. 2) Act 2023 (c. 30), s. 42(2)(4)

103KFE Anti-avoidance U.K.

(1) This section applies where an election was made by an individual under section 103KFA and the main purpose, or one of the main purposes, of making the election is to cause a loss to be treated as accruing to the individual under subsection (3) of section 103KFD.

(2) Any such loss that would (in the absence of this section) accrue to the individual under that subsection is to be counteracted by the making of such adjustments as are just and reasonable.

(3) Any adjustments required to be made under this section (whether or not by an officer of Revenue and Customs) may be made by way of—

(a) an assessment,

(b) the modification of an assessment, or

(c) amendment or disallowance of a claim, or otherwise.]

Textual Amendments

F5 Ss. 103KFA-103KFE inserted (with effect for the tax year 2022-23 and subsequent tax years) by Finance (No. 2) Act 2023 (c. 30), s. 42(2)(4)

103KG Meaning of “arise” in Chapter 5 U.K.

(1) For the purposes of this Chapter, carried interest “arises” to an individual (“A”) if, and only if, it arises to him or her for the purposes of Chapter 5E of Part 13 of ITA 2007.

(2) But section 809EZDB of ITA 2007 (sums arising to connected company or unconnected person) does not apply in relation to a sum of carried interest arising to—

(a) a company connected with A, or

(b) a person not connected with A,

where the sum is deferred carried interest in relation to A.

(3) In this section, “deferred carried interest”, in relation to A—

(a) means a sum of carried interest where the provision of the sum to A or a person connected with A is deferred (whether pending the meeting of any conditions (including conditions which may never be met) or otherwise), and

(b) includes A's share (as determined on a just and reasonable basis) of any carried interest the provision of which to A and one or more other persons, taken together, has been deferred (whether pending the meeting of any conditions (including conditions which may never be met) or otherwise).

In this subsection, in a case where the sum referred to in subsection (2) arises to a company connected with A, the reference to a person connected with A does not include that company.

(4) Where—

(a) section 809EZDB of ITA 2007 has been disapplied in relation to a sum of deferred carried interest by virtue of subsection (2),

(b) the sum ceases to be deferred carried interest in relation to A, and

(c) the sum does not in any event arise to A apart from this subsection,

the sum is to be regarded as arising to A at the time it ceases to be deferred carried interest.

(5) But subsection (4) does not apply if—

(a) none of the enjoyment conditions is met in relation to the sum when it ceases to be deferred carried interest, and

(b) there is no reasonable likelihood that any of those conditions will ever be met in relation to the sum.

(6) The enjoyment conditions are—

(a) the sum, or part of the sum, is in fact so dealt with by any person as to be calculated at some time to enure for the benefit of A or a person connected with A;

(b) the sum's ceasing to be deferred carried interest in relation to A operates to increase the value to A or a person connected with A of any assets which—

(i) A or the connected person holds, or

(ii) are held for the benefit of A or the connected person;

(c) A or a person connected with A receives or is entitled to receive at any time any benefit provided or to be provided out of the sum or part of the sum;

(d) A or a person connected with A may become entitled to the beneficial enjoyment of the sum or part of the sum if one or more powers are exercised or successively exercised (and for these purposes it does not matter who may exercise the powers or whether they are exercisable with or without the consent of another person);

(e) A or a person connected with A is able in any manner to control directly or indirectly the application of the sum or part of the sum.

In this subsection, in a case where the sum referred to in subsection (2) arises to a company connected with A, references to a person connected with A do not include that company.

(7) In determining whether any of the enjoyment conditions is met in relation to a sum or part of a sum—

(a) regard must be had to the substantial result and effect of all the relevant circumstances, and

(b) all benefits which may at any time accrue to a person as a result of the sum ceasing to be deferred carried interest in relation to A must be taken into account, irrespective of—

(i) the nature or form of the benefits, or

(ii) whether the person has legal or equitable rights in respect of the benefits.

(8) The enjoyment condition in subsection (6)(b), (c) or (d) is to be treated as not met if it would be met only by reason of A holding shares or an interest in shares in a company.

(9) The enjoyment condition in subsection (6)(a) or (e) is to be treated as not met if the sum referred to in subsection (2) arises to a company connected with A and—

(a) the company is liable to pay corporation tax in respect of its profits and the sum is included in the computation of those profits, or

(b) paragraph (a) does not apply but—

(i) the company is a CFC and the exemption in Chapter 14 of Part 9A of TIOPA 2010 applies for the accounting period in which the sum arises, or

(ii) the company is not a CFC but, if it were, that exemption would apply for that period.

In this subsection “CFC” has the same meaning as in Part 9A of TIOPA 2010.

(10) But subsections (8) and (9) do not apply if the sum referred to in subsection (2) arises to the company referred to in subsection (2)(a) or the person referred to in subsection (2)(b) as part of arrangements where—

(a) it is reasonable to assume that in the absence of the arrangements the sum or part of the sum would have arisen to A or an individual connected with A, and

(b) it is reasonable to assume that the arrangements have as their main purpose, or one of their main purposes, the avoidance of a liability to pay income tax, capital gains tax, inheritance tax or corporation tax.

(11) The condition in subsection (10)(b) is to be regarded as met in a case where the sum is applied directly or indirectly as an investment in a collective investment scheme.

(12) Subsection (2) does not apply in relation to any sum in relation to which the condition in subsection (8)(b) of section 809EZDB is met by virtue of subsection (9) of that section.

(13) Subsection (2) also does not apply if—

(a) it is reasonable to assume that the deferral referred to in subsection (3)(a) or (b) is not the effect of genuine commercial arrangements, or

(b) that deferral is the effect of such arrangements but it is reasonable to assume that the arrangements have as their main purpose, or one of their main purposes, the avoidance of a liability to pay income tax, capital gains tax, corporation tax or inheritance tax.

(14) In subsection (13), “genuine commercial arrangements” means arrangements involving A (alone or jointly with others performing investment management services) and external investors in the investment scheme.

(15) Section 993 of ITA 2007 (meaning of “connected”) applies for the purposes of this section but as if—

(a) subsection (4) of that section were omitted, and

(b) partners in a partnership in which A is also a partner were not “associates” of A for the purposes of sections 450 and 451 of CTA 2010 (“control”).

103KH Interpretation of Chapter 5 U.K.

(1) In this Chapter—

• “arrangements” has the same meaning as in Chapter 5E of Part 13 of ITA 2007 (see section 809EZE of that Act);

• “carried interest”, in relation to arrangements referred to in section 103KA(1)(a), has the same meaning as in section 809EZB of ITA 2007 (see sections 809EZC and 809EZD of that Act);

• “investment scheme”, “investment management services” and “external investor” have the same meanings as in Chapter 5E of Part 13 of ITA 2007 (see sections 809EZA(6) and 809EZE of that Act).]