IFM36330 - Disguised fees: The enjoyment conditions - overview

The enjoyment conditions - overview

ITA07/S809EZDB(2)

After 22 October 2015, condition 2 (IFM36316) requires that, in addition to a sum arising on an individual, one of the enjoyment conditions must be met in order for a disguised investment management fee charge to be possible.

Broadly speaking, at least one of the enjoyment conditions will usually be met whenever it could be claimed that the sum which arises to the unconnected person (or connected company) is ‘under the control of’ or ‘could benefit’, the fund manager or a person connected with the fund manager. See below for further information on how to determine connection.

More specifically the enjoyment conditions in relation to any sum are as follows:

In respect of the individual (A) or a person connected with A:

(a) the sum is calculated at some time to enure for the benefit of A;

(b) the sum arising operates to increase the value of assets, held by A, or for the benefit of A;

(c) A receives or is entitled to receive at any time any benefit provided out of the sum;

(d) A may become entitled to the beneficial enjoyment of the sum if one or more powers are exercised (by anyone with or without consent of another party);

(e) A is able in any manner to directly or indirectly control the application of the sum

All enjoyment conditions above would also be met if a person connected with A meets the criteria (besides where the sum has arisen to a company connected with A (ITA07/S809EZDB(2)).

Example

If a sum arises from an investment scheme to a trust structure from which an investment manager’s children can benefit.

The enjoyment condition will be met and that fund manager charged to tax, even if they themselves are excluded from the class of beneficiaries of the trust and will never receive benefit from the amount arising.

 

To meet condition (a) the sum must be for the benefit of the particular individual who is potentially subject to the charge, or a person connected with the individual. It will not be sufficient that the sum benefits a group of unconnected individuals.  In situations where an individual holds shares in an unconnected company, condition (a) will not automatically be met if the company receives an unconnected management fee which in turn raises the value of the company’s shares. See IFM36335 for an example.

The meaning of connection in relation to the enjoyment conditions is taken from ITA07/S993, with two modifications:

• firstly, persons will not be connected solely by virtue of being members of a partnership, they would also have to be connected in another way.
• secondly, members of a partnership are not treated as associated when determining whether a person has control of a company. This means that if a sum arises to a company owned by a partnership it will not be treated as arising to each individual member of that partnership.

These modifications are made to recognise that there are circumstances where a corporate general partner of a limited partnership fund (or a General Partner Limited Partner) could fall within the enjoyment conditions.  Without the modifications a priority profit share arising to a corporate general partner would be treated as arising to a company connected with any individual member of an LLP, however small their interest, in the absence of this provision.

Where an individual partner has control of a company through the direct or indirect holding of a partnership interest, the enjoyment conditions will treat that individual and the company as connected. 

These enjoyment conditions have the same meaning in relation to sums arising to asset managers as they do in the transfer of assets abroad rules and mixed membership rules (see ITTOIA05/S850C(20)). They will apply to structures where for example, sums arise to trustees of a trust from which the manager could potentially benefit. They also apply where sums arise to corporate structures which are, in effect, controlled by such trustees.

When determining if an enjoyment condition is met in relation to a sum you must consider the result and effect of all the facts and circumstances surrounding the sum arising.  Where carried interest is deferred, it is important to bring into account all benefits which may at any time accrue in respect of it (IFM37266) to an individual (whether or not the individual has any rights in respect of those benefits). For example, an amount of carried interest has been allocated and it is deferred pending a potential claw-back but a loan is offered to someone connected to the individual whose services has resulted in the carried interest award and subsequent allocation.

This is the position even if the individual has no rights whatsoever in relation to the deferred carried interest (even as regards the rules and process which surrounded its application and distribution) and regardless of the form the eventual benefits provided from that carried interest could take.

The enjoyment conditions: part sums

The enjoyment conditions (a), (c), (d) and (e) apply to any part of the sum.  This means that the disguised investment management fees (DIMF) rules will apply where only part of the fee meets the condition or where for example a sum arising forms part of a larger sum for the benefit of a wider group of people.