IFM37322 - Foreign Chargeable Gains: Apportionment: Location of services performed

Location of services performed

When considering the foreign chargeable gain which accrues, the focus will be on the services performed by the individual fund manager. A fund manager who performs the vast majority of their investment management services outside the UK would not be prejudiced by the activities of his or her UK focussed colleagues. See Example 1 below

Where carried interest arises in one year but reflects services performed by an individual over longer and earlier periods, it may be appropriate to look at where those services were actually performed. Any apportionments should be on a just and reasonable basis. See Example 2 below.

Example 1

Karl and David work for a UK headquartered fund management business. They are both resident in London and provide investment management services in respect of collective investment schemes in London and overseas.

Karl is a German national but his role and duties are concentrated in Germany and Austria. Karl leads the teams responsible for investment in those jurisdictions and spends 2 to 3 days a week in Germany.

David is a French national. David spends one week a month in Germany to support the management team operating there, including Karl’s transactions. David also spends significant amounts of time in the UK, working on setting up, negotiating the acquisition of assets and then later the disposal of Karl’s German and Austrian transactions.

Karl and David will each need to consider appropriate methodologies to apportion the carried interest gain that arises to each of them.

Example 2

D Capital LLP manages various alternative investment funds, including private equity funds. It has management teams located in various jurisdictions, including the UK, but is headquartered in New York.

Joan is based in the US, and her primary responsibilities are in relation to D Capital’s US buyout funds, although Joan does provide limited advice and support to management teams throughout the world. After some years providing investment management services to D Capital’s current US buyout fund, she is transferred to their London office to support a business expansion. She retains her carried interest in the US buy-out fund, and continues to provide some limited support to its remaining management team, but her future focus will be on various European funds (in which she will be given carried interest).

The US buy-out fund has performed well and the performance hurdle is hit immediately after Joan moves to London and becomes resident for tax purposes in the UK, over the following years she receives sums in respect of her carried interest in the US buy-out fund.

These sums will amount to ‘carried interest’ for the purposes of the carried interest rules. Joan is also performing investment management services in the UK during the period when they arise and so is potentially within the scope of these rules. Furthermore, during the years when she receives carried interest the vast majority of her fund management activities are performed in the UK.

This does not mean, however, that Joan’s carried interest will be charged to UK tax under the carried interest rules. Depending on the extent of support given to the US buyout funds after she became UK resident, the correct conclusion on a review of the all facts may be that some or none of carried interest relates to Joan performing services in the UK. This is because it arises in respect of services Joan performed outside the UK, even though it arises to her after she has become UK resident.

A just and reasonable apportionment should be made between any US and UK based services in relation to the carried interest paid and the carried interest arising to Joan in respect of her US services would be classed as a foreign chargeable gain whereas the carried interest arising due to Joan’s UK services could be chargeable to UK tax under the new carried interest rules.

The just and reasonable apportionment should fairly reflect the time spent by the individual working in the UK and abroad and, where relevant, the relative value and importance of the work actually performed in the UK or abroad. This apportionment will, regardless of the nature of the underlying assets, produce an amount which is taxable on the remittance basis (Non-UK portion) and an amount which is taxable on the arising basis (UK portion). This could therefore lead to an individual being taxed under the arising basis, on part or all of a sum, where previously they would have only been taxed under the remittance basis.