IFM37280 - Charging Provisions: External investors and the "base cost shift"

External investors and the “base cost shift”

TCGA92/S103KF

The carried interest rules were introduced, in part, to remove the ability for investment managers to utilise base cost shift (IFM37160).

Base cost shift occurs where the profit sharing ratio of a partnership changes such that a member participates in the profits of a partnership in relation to an asset or assets to a greater extent than before. This treatment follows from HMRC’s interpretation of the capital gains tax legislation embodied in Statement of Practice D12 (SoPD12). For further guidance please search for “Statement of Practice D12” on the website.

Where the increase in base cost for the fund manager has been disallowed under the carried interest rules, TCGA92/S103KF allows an external investor who had shifted the base cost to make a claim to reduce their chargeable gain from the asset(s) disposed of by an amount equal to the sum invested by them less any amount deducted under TCGA92/S38(1)(a) as consideration for the asset(s). This is only to the extent that the deduction is wholly and exclusively for the acquisition of the asset(s).

In situations where a partnership has invested in another partnership TCGA/S103KF can provide credit for the taxpayers in the underlying partnership as long as all the requirements within TCGA/S103KA-KH have been met.

With regards to the provisions of TCGA92/S103KF, where carried interest holders have also made co-investment, HMRC will consider them as “external investors” in relation to only the co-investment amount.