IFM37430 - Prevention of double taxation: Double taxation relief and trusts

Double taxation relief and trusts

TCGA92/S103KE

A claim for relief can be made under TCGA92/S103KE where:

• a distribution is made from an offshore trust, which holds the right to receive the carried interest arising from performance of investment management services by the investment manager, with the express intention of meeting the tax liabilities charged upon the investment manager under TCGA92/S103KA for those services, and
• that distribution is made by way of a payment made directly from the trust to the investment manager after the trust has received the payment of carried interest.

After the sum of carried interest has been received by the trustees, it would be expected that distributions would be made to the investment fund manager by the trust without delay.

TCGA92/S86(4ZB) and TCGA92/S87(5B) exclude carried interest gains from the rules within S86 and S87 of TCGA92. Where the payment from the trust to the fund manager comprises wholly of carried interest gains from capital proceeds from that transaction, no further tax charge should arise. If there is a tax charge resulting from the payment due to income of the trust or gains that are not carried interest being distributed, then those should be relieved under TCGA92/S103KE.

Where the fund manager has taken out a loan either from the trust itself or from a third party and it can be demonstrated that the payment from the trust is for the express purpose of settling a debt that was taken out to settle a tax charge arising under TCGA92/S103KA, then any associated tax charge on that individual can be relieved under TCGA92/S103KE.

Where this payment is made to another individual because the investment manager is expressly excluded from being a beneficiary of the trust TCGA92/S103KE will not apply.

Where the payment is going to another person, it is not considered that the link between the distribution from the trust and the carried interest can be sufficiently strong enough to demonstrate that a charge arising to that individual is in relation to carried interest.

Relief under TCGA92/S103KE can only be claimed in respect of amounts distributed with the express intention of meeting a tax liability arising under TCGA92/S103KA. Relief cannot be claimed in respect of any amount distributed in excess of what is required to meet the tax liability.

Example

Carried interest of £2m is received by Offshore Trust A, which holds the right to receive the carried interest arising from the performance of investment management services by Mr B. The sole beneficiary of Offshore Trust A is Mr B, a UK resident investment fund manager. Mr B is liable for tax of £560,000 under TCGA92/S103KA in respect of the carried interest which arose to Mr B under an arrangement by way of profit related return.

The Offshore Trust A receives the carried interest and immediately makes a distribution directly to Mr B of £1m.

Of this £1m:

• £560,000 represents a payment to meet the tax liability arising under TCGA92/S103KA – a claim for relief under TCGA92/S103KE can be made in respect of any tax incurred by Mr B on this part of the distribution. £440,000 is not a payment to meet any tax liability and therefore any tax on this part of the distribution cannot be subject to a claim for relief under TCGA92/S103KE.