Capital Gains Tax: carried interest
Published 22 November 2017
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Who is likely to be affected
Individuals involved in investment management for private equity or other investment funds who receive amounts of carried interest after 22 November 2017.
General description of the measure
The measure will remove certain transitional rules that are no longer required for the effective taxation of amounts of carried interest that are charged to Capital Gains Tax (CGT) under the carried interest rules which took effect from 8 July 2015.
The transitional rules affected relate to:
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an exclusion from the new rules for amounts of carried interest arising to an investment manager on or after 8 July 2015 in connection with a disposal of partnership assets before that date
-
application of provisions in the disguised investment management fee rules which determine the time at which amounts of carried interest arise to a manager including where the right to carried interest has been assigned to someone else
As a result of the measure, these transitional rules will not apply to carried interest arising on or after 22 November 2017.
Policy objective
This measure will make the tax system fairer by preventing the limited transitional exceptions provided in the commencement provisions for the carried interest rules from being manipulated to unfairly reduce the tax payable in circumstances not intended by the original legislation
Background to the measure
This measure was announced at Autumn Budget 2017.
Detailed proposal
Operative date
This measure will apply to all carried interest arising on or after 22 November 2017.
Current law
Current law on the taxation of carried interest within sections 103KA to 103KH Taxation of Chargeable Gains Act (TCGA) 1992 was introduced by section 43 of Finance (No.2) Act 2015 with effect for carried interest arising on or after 8 July 2015. Sections 43 and 45 of the latter Act provide for certain amounts of carried interest to be excluded from section 103KA etc. (and from some sections of the Income Tax Act 2007) by reference to their arising in connection with disposals of assets before specified dates. Chapter 5E of Part 13, Income Tax Act 2007 contains definitions that are relevant for the purposes of the taxation of amounts of carried interest.
Proposed revisions
Legislation will be introduced in Finance Bill 2017-18 to confirm that the carried interest provisions in sections 103KA to 103KH TCGA 1992 will apply to all carried interest arising after 22 November 2017. This legislation will remove the transitional provision which excluded sums of carried interest arising after 8 July 2015 and in connection with the disposal of a partnership asset before that date.
The definitions of ‘arise’ in ITA 2007 and the provisions in section 103KG(2) to (15) will apply uniformly to amounts of carried interest arising after 22 November 2017, irrespective of any connection with disposals prior to 22 October 2015.
Summary of impacts
Exchequer impact (£m)
| 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 |
|---|---|---|---|---|---|
| nil | +20 | +170 | +165 | +150 | +145 |
These figures are set out in Table 2.1 of Autumn Budget 2017 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2017. This measure also supports the Exchequer in its commitment to protect revenue.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
A behavioural response of those affected by the measure is included in the costing.
Impact on individuals, households and families
This measure will have an impact on individuals working in private equity firms or elsewhere in the investment manager sector and will ensure that the correct amount of CGT is accounted for on carried interest. Individuals may benefit from the simpler calculation of the CGT liability that will now be required.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
This measure will affect individuals receiving carried interest from investments funds. It will affect those with protected characteristics within the investment management sector. Lower income groups are unlikely to be affected.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses and civil society organisations. This measure will affect all businesses that receive carried interest and will ensure that the correct amount of CGT is accounted for. One off costs include familiarisation with the new rules. Businesses are expected to see negligible on-going savings from the simpler calculation of CGT. Civil society organisations will not be affected.
Operational impact (£m) (HMRC or other)
It is not anticipated that implementing this change will incur any additional costs / savings for HMRC
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information provided on tax returns and through communication with taxpayers and practitioners affected by the measure.
Further advice
If you have any questions about this change, please contact Hayley Moran on Telephone: 03000 514795 or email: hayley.moran@hmrc.gsi.gov.uk.