INTM610270 - Interaction with Other Legislation: Carried Interest and Disguised Investment Management Fees

Remuneration for investment management services is typically divided between various parties to a fund arrangement. The fixed fee will show in the accounts of the investment management business as trading income, while the contingent fee element, typically referred to as carried interest, may be recognised in a special purpose vehicle and distributed. Where carried interest arises to individuals in respect of investment management services provided to a collective investment scheme, there are specific rules within Chapter 5, Part 4 of Taxation of Chargeable Gains Act 1992, that determine how this will be brought into account for tax purposes.

It is expected that the value of the remuneration paid for the investment management services will be an arm’s length value under a typical commercial arrangement. In circumstances where the contingent fee element of the remuneration includes ‘disguised investment management fees’, the existing legislation at Chapter 5E Part 13 ITA 07 applies in priority to the Profit Fragmentation rules and should result in the correct amount of UK tax being paid.