IFM37710 - Accruals basis elections: introduction

TCGA92/S103KFA

The general rule is that an individual is taxed on a sum which falls within the definition of carried interest contained in ITA07/S809EZC (IFM36520) or ITA07/S809EZD (IFM36540)] when that sum arises (IFM37260) to them.

The general rules in TCGA92/Part3/Ch 5 provide that a sum that is carried interest will, after certain deductions, constitute a chargeable gain and be subject to capital gains tax (IFM37210). Where another UK tax has already been charged on the same sum then TCGA92/S103KE allows for the capital gains tax to be reduced to prevent double taxation. No relief is available under this provision for non-UK tax charges (IFM37410).

Sometimes, as a consequence of commercial arrangements that give rise to sums of carried interest or their own personal circumstances, an individual may be subject to tax in more than one jurisdiction in respect of those arrangements and/or circumstances. The UK has negotiated double taxation treaties with more than 100 countries in order to avoid double taxation and facilitate the provision of relief in such situations.

For guidance on how to determine the extent to which a sum of carried interest is a chargeable gain in circumstances where investment management services are performed outside of the UK see (IFM37310+).

Some jurisdictions tax carried interest arrangements on a different basis to the UK. In some circumstances, this can mean that an individual is taxed in another jurisdiction on sums of carried interest before those sums actually arise to the individual. This earlier taxing point can create a timing mismatch; the other jurisdiction may have domestic legislation and administrative rules which can make it difficult to obtain double taxation relief under the terms of the relevant double taxation treaty.

TCGA92/S103KFA-S103KFE introduces the ability for an individual to make an ‘accruals basis election’ in respect of their carried interest arrangements from a particular investment scheme. This election provides individuals with the option for sums of carried interest to be recognised and taxed in the UK as the profits arise within the investment scheme which may result in some or all of the carried interest sum being taxed in earlier tax years than under the general rules. This may make it easier for individuals to obtain double taxation relief in the other jurisdiction under the terms of the applicable tax treaty.

Elections can be made from 12 July 2023 with effect from 6 April 2022.