IFM37150 - Overview: Commencement
Commencement
Finance (No.2) Act 2015/S43
Finance Act 2018/S37(1)
Finance (No.2) Act 2015/S43(1) introduced the carried interest rules by inserting new sections TCGA92/S103KA-KH. These rules apply to sums of carried interest arising on or after 8 July 2015 under any arrangements.
Finance Act 2018/S37(1) modified these rules as from 22 November 2017 however which means there is a period of transition from 8 July 2015 to 21 November 2017. The rules were modified to include amounts of carried interest that arose on or after 8 July 2015 in relation to a disposal occurring before that date within the new carried interest rules.
Transitional rule up to 21 November 2017
Finance (No.2) Act 2015/S43(2) stipulates that the carried interest rules at TCGA92/S103KA-KH:
"…has effect in relation to carried interest arising on or after 8 July 2015 under any arrangements, unless the carried interest arises in connection with the disposal of an asset or assets of a partnership or partnerships before that date."
Therefore, where carried interest arises on or after 8 July 2015 but the disposal of the asset(s) held by the partnership(s) giving rise to the carried interest took place before 8 July 2015, TCGA92/S103KA-KH will not apply.
This situation may occur where amounts of carried interest were placed into escrow or other deferral arrangements before 8 July 2015 and only released to the fund manager after 8 July 2015. Where this situation arises, the tax liability of the fund manager is determined under the pre-existing rules and not the current rules found at TCGA92/S103KA-KH.
HMRC strongly disagrees with a view adopted by some advisers that Parliament intended a wide interpretation of the term 'in connection with' when considering Finance (No.2) Act 2015/S43(2). HMRC holds that the term 'in connection with' is in reference to disposals that have directly triggered a sum of carried interest, a view which was upheld by the First-tier Tribunal in Ferguson-Davie & Edwards v HMRC [2024] UKFTT 321 (TC). HMRC will challenge any contrary view.
Furthermore, HMRC does not agree that a wider interpretation means carried interest to be calculated by reference to non-direct disposals made prior to 8 July 2015 would be out of scope of TCGA/S103KA-KH.
The commencement rules however are focused on specific disposals which trigger payments of specific sums of carried interest. Where it is argued that a disposal is not connected in such a direct way to a specific carried interest sum, HMRC will challenge that view. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
Removal of transitional rule
From 22 November 2017, Finance Act 2018/S37(1) provided that all sums of carried interest from a partnership arrangement arising, on or after 8 July 2015 are subject to TCGA92/S103KA-KH. This includes amounts that were previously held in escrow and are released on or after 22 November 2017.
This means that carried interest arising on or after 22 November 2017 will be subject to the carried interest provisions within TCGA92/S103KA-KH irrespective of the timing of connected disposals of partnership assets. This removal of the transitional rule does not signal that HMRC's view of the transitional rule as originally enacted has changed.