IFM37236 - Charging provisions: Operation of the charge: Permitted deductions

Permitted deductions

TCGA92/S103KA(5) - (6)

Only specified sums will be allowable as a deduction against the amount of carried interest arising to an individual when calculating the chargeable gain. This is to ensure that individuals are charged to tax on their true economic gain.

Deductions will be permitted for such parts of the following amounts as are just and reasonable:

• any consideration actually given by the individual in the form of money in return for entering into the arrangements under which the carried interest arises (but excluding any genuine co-investment);
• any amounts constituting earnings of the individual under Chapter 1 of Part 3 of Income Tax (Earning and Pensions) Act 2003 (ITEPA 2003) on entering into the arrangements; and
• any amounts relating to the individual’s interest in the fund under specified provisions of the employment-related securities regime (these are the same provisions listed in TCGA92/S119A(3)).

In order for an amount to be just and reasonable in this context it must be closely and directly associated with the arising of or acquiring the rights to carried interest.

Consideration provided for co-investments (IFM36400) is also specifically excluded under both (b) and (c). This is to prevent fund managers from making contributions to both genuine co-investments and a nominal amount in respect of their carried interest, then erroneously deducting the element attributable to the co-investment when calculating the gain.

Deductions are not permitted for base cost contributed by other members of the partnership, or attributable to revaluations of the partnership assets, as was previously possible under Statement of Practice D12 (the “base cost shift”, explained in IFM37160).