Finance Bill (HC Bill 47)

(a) when identifying, for the purpose of determining the average
holding period of an investment scheme, what relevant
investments are held for the purposes of an investment scheme,
and

(b) 5for any other purpose relating to the determination of the
average holding period.

This is subject to the following provisions of this Chapter.

(6) In this section, references to the length of time for which a relevant
investment has been held are—

(a) 10in the case of an investment which has been disposed of before
the carried interest arises, references to the time for which it was
held before being disposed of, and

(b) in any other case, references to the time for which it has been
held up to the time the carried interest arises.

(7) 15For the purposes of this Chapter, carried interest which is deferred
carried interest in relation to a person within the meaning of section
103KG of TCGA 1992 is to be treated as arising to that person at the time
it would have arisen had it not been deferred as specified in section
103KG(3)(a) or (b) of that Act.

(8) 20Sections 809FZD to 809FZP apply for the purposes of determining the
average holding period of an investment scheme.

Average holding period: disposals

809FZD Disposals

(1) An investment or part of an investment is disposed of where—

(a) 25there is a disposal of the investment or the part of the
investment for the purposes of the investment scheme,

(b) there is a disposal for the purposes of the investment scheme of
an intermediate holding or intermediate holding structure
(including an intermediate investment scheme) by or through
30which the investment is held, or

(c) in any other case, there is a deemed disposal under subsection
(2).

(2)
There is a deemed disposal of an investment or part of an investment
under this subsection where—

(a) 35under any arrangements—

(i) the scheme in substance closes its position on the
investment or the part of the investment, or

(ii) the scheme ceases to be exposed to risks and rewards in
the respect of the investment or the part of the
40investment, and

(b) it is reasonable to suppose that the arrangements were designed
to secure that result.

(3) In the case of a disposal of part of a holding of securities in a company
which are of the same class, suppose for the purposes of determining
45which investments have been disposed of that the disposal affects the
securities in the order in which they were acquired (that is, on a first in
first out basis).

(4) The references in subsection (1)(a) and (b) to a disposal are to
something which is a disposal for the purposes of TCGA 1992; but for
the purposes of subsection (1)(a) disregard section 116 of TCGA 1992
(which disapplies sections 127 to 130 of that Act in relation to qualifying
5corporate bonds).

809FZE Part disposals

(1) Where there is a disposal of part of an investment, the part disposed of
and the part not disposed of are to be treated as two separate
investments which were made at the same time.

(2) 10The value of each of those two separate investments is the appropriate
proportion of the value first invested in the whole investment.

(3) The appropriate proportion is the proportion of the value of the part in
question to the value of the whole investment at the time of the
disposal.

(4) 15The disposal of part of an asset includes the disposal of an interest in or
right over the asset (and “part disposed of” is to be construed
accordingly).

809FZF Unwanted short-term investments

(1) The making and disposal of an investment for the purposes of an
20investment scheme are to be disregarded if—

(a) the investment is an unwanted short-term investment, and

(b) the unwanted short-term investment is excludable.

(2) An investment is an unwanted short-term investment where—

(a) the investment is made as part of a transaction under which one
25or more other investments are made for the purposes of the
scheme,

(b) the value of the investment does not exceed that of the other
investments taken together,

(c) it is reasonable to suppose that the investment had to be made
30in order for the other investments to be made,

(d) at the time the investment is made, managers of the scheme
have a firm, settled and evidenced intention to dispose of the
investment for the purposes of the scheme within the relevant
period,

(e) 35the investment is disposed of for the purposes of the scheme
within the relevant period, and

(f) any profit resulting from the disposal has no bearing on
whether a sum of carried interest arises or on the amount of any
sum of carried interest which does arise.

(3) 40An unwanted short-term investment is excludable if it constitutes—

(a) an investment in land,

(b) an investment in securities in an unlisted company,

(c) the making of a direct loan where the other investments
specified in subsection (2)(b) are shares or other securities in an
45unlisted company, or

(d) the making of a direct loan which is a qualifying loan within the
meaning given by section 809FZR(2).

(4) In subsection (2)(e) “relevant period” means—

(a) for an investment within subsection (3)(a), 12 months;

(b) for an investment within subsection (3)(b) or (c), 6 months;

(c) for an investment within subsection (3)(d), 120 days.

(5) 5But if at any time it becomes reasonable to suppose that, when the
scheme ceases to invest, 25% or more of the capital of the investment
scheme will have been invested in unwanted short-term investments
which are excludable, subsection (1) does not apply to any investment
made subsequently for the purposes of the scheme.

10Average holding period: derivatives and hedging

809FZG Derivatives

(1) A derivative contract entered into for the purposes of an investment
scheme is an investment, subject to the following provisions of this
section.

(2) 15The value invested in the derivative contract is—

(a) where the contract is an option, the cost of acquiring the option
(whether from the grantor or another person),

(b) where the contract is a future, the price specified in the contract
for the underlying subject matter, or

(c) 20where the contract is a contract for differences, the notional
principal of the contract.

(3) But where entering into a derivative contract constitutes a deemed
disposal of an investment or part of an investment by virtue of section
809FZD(2)(a)(ii)—

(a) 25the derivative contract is not an investment, and

(b) the subsequent disposal of the derivative contract without a
corresponding disposal of the investment or part investment is
to be regarded as the making of a new investment to the extent
that the scheme becomes materially exposed to risks and
30rewards in respect of the investment or part investment.

(4) For the purposes of this Chapter, references to disposal, in the case of a
derivative contract, include any of the following events (to the extent
that the event is not otherwise a disposal under section 809FZD(1) or
(2))—

(a) 35the expiry of the contract,

(b) the termination of the contract (whether or not in accordance
with its terms),

(c) the disposal, substantial variation, loss or cancellation of the
investment scheme’s rights under the contract, and

(d) 40in the case of a derivative contract which is an option, the
exercise of the option,

but do not include the renewal of the contract with the same
counterparty on substantially the same terms.

(5) The substantial variation of an investment scheme’s rights under a
45derivative contract constitutes (in addition to the disposal of the
contract as originally entered into (see subsection (4)(c)) a new
investment consisting of the contract as varied.

809FZH Hedging: exchange gains and losses

(1) This section applies where—

(a) an investment scheme has a hedging relationship between a
relevant instrument and a relevant investment, and

(b) 5the hedging relationship relates to exchange gains or losses.

(2) In this section—

• “relevant instrument” means a derivative contract or a liability
  representing a loan relationship, and

• “relevant investment” means—

  (a)

  10where the relevant instrument is a derivative contract,
  an investment made for the purposes of the scheme or a
  liability representing a loan relationship;

  (b)

  where the relevant instrument is a liability representing
  a loan relationship, an investment made for the
  15purposes of the scheme.

(3) An investment scheme has a hedging relationship between a relevant
instrument and a relevant investment if or to the extent that—

(a) the instrument and the investment are designated by the
scheme as a hedge, or

(b) 20in any other case, the instrument is intended to act as a hedge of
exposure to—

(i) changes in fair value of the investment or an identified
portion of the investment, or

(ii) variability in cash flows,

25where the exposure is attributable to exchange gains or losses
and could affect profit or loss of the investment scheme.

(4) Entering into the hedging relationship is not a deemed disposal of the
relevant investment under section 809FZD(2).

(5) The relevant instrument is not an investment for the purposes of the
30investment scheme to the extent that the conditions in subsection (3)(a)
and (b) are met.

(6) But the termination of the hedging relationship is the making of an
investment constituting the relevant instrument if or to the extent that
that instrument continues to subsist.

809FZI 35 Hedging: interest rates

(1) This section applies where an investment scheme has a hedging
relationship between—

(a) an interest rate contract, and

(b) a qualifying investment held for the purposes of the fund.

(2) 40An investment scheme has a hedging relationship between an interest
rate contract and a qualifying investment if or to the extent that—

(a) the interest rate contract and the investment are designated by
the scheme as a hedge, or

(b) in any other case, the interest rate contract is intended to act as
45a hedge of exposure to—

(i) changes in fair value of the investment or an identified
portion of the investment, or

(ii) variability in cash flows,

where the exposure is attributable to interest rates and could
5affect profit or loss of the investment scheme.

(3) Entering into the hedging relationship is not a deemed disposal of the
relevant investment under section 809FZD(2).

(4) The interest rate contract is not an investment for the purposes of the
investment scheme to the extent that the conditions in subsection (2)(a)
10and (b) are met.

(5) But the termination of the hedging relationship is the making of an
investment constituting the interest rate contract if or to the extent that
the interest rate contract continues to subsist.

(6) In this section “qualifying investment” means—

(a) 15money placed at interest,

(b) securities (excluding shares issued by companies),

(c) alternative finance arrangements, and

(d) a liability representing a loan relationship.

Average holding period: aggregation of acquisitions and disposals

809FZJ 20 Significant interests

(1) Where an investment scheme has a controlling interest in a trading
company or the holding company of a trading group—

(a) any investment made for the purposes of the scheme in that
company after the time when the controlling interest was
25acquired is to be regarded as having been made at that time, and

(b) any disposal for the purposes of the scheme of an investment in
the company after the time the controlling interest was acquired
is to be regarded as not being made until a relevant disposal is
made.

(2) 30In subsection (1)(b) “relevant disposal”, in relation to a company,
means a disposal which (apart from subsection (1)) has the effect that
the investment scheme ceases to have a 40% interest in the company.

(3) For the purposes of this section, in determining whether an investment
scheme has a controlling interest or a 40% interest in a company, any
35share capital of the company which is held for the purposes of an
associated investment scheme is to be regarded as held for the purposes
of the investment scheme.

809FZK Venture capital funds

(1) Where a venture capital fund has a relevant interest in a trading
40company or the holding company of a trading group—

(a) any venture capital investment made for the purposes of the
scheme in the company after the time the relevant interest was
acquired (and before a relevant disposal) is to be regarded as
having been made at the time the relevant interest was
45acquired, and

(b) any disposal for the purposes of the scheme of a venture capital
investment in the company after that time is to be regarded as
not being made until—

(i) a relevant disposal is made, or

(ii) 5the scheme director condition ceases to be met.

(2) For the purposes of subsection (1) a venture capital fund has a relevant
interest in a company if —

(a) by virtue of its venture capital investments the fund has at least
a 5% interest in the company, or

(b) 10venture capital investments held for the purposes of the scheme
in the company have a value of more than £1 million.

(3) For the purposes of subsection (1) “relevant disposal” means a disposal
which (apart from subsection (1)) has the effect that the venture capital
fund has disposed of more than 80% of the greatest amount invested at
15any one time in the company for the purposes of the fund.

(4) In this Chapter, “venture capital fund” means an investment scheme in
relation to which the condition in subsection (5) is met.

(5) The condition is that when the scheme starts to invest it is reasonable to
suppose that over the investing life of the scheme—

(a) 20at least two-thirds of the total value invested for the purposes of
the scheme will be invested in venture capital investments, and

(b) at least two-thirds of the total value invested for the purposes of
the scheme will be invested in investments which are held for
40 months or more.

(6) 25In determining whether subsection (5)(b) is met in relation to an
investment scheme, apply the rule in subsection (1) to the scheme.

(7) In this section, “venture capital investment”, in relation to an
investment scheme, means an investment in a trading company or the
holding company of a trading group where—

(a) 30at the time the investment is made the company is unlisted and
is likely to remain so,

(b) at least 75%of the total value of the investment is invested in—

(i) newly issued shares or

(ii) newly issued securities convertible into shares,

(c) 35the investment is used in a trade carried on by the trading
company or the trading group—

(i) to support its growth, or

(ii) for the development of new products or services,

and is not used directly or indirectly to acquire shares in the
40company which are not newly issued,

(d) if the investment is the first investment made in the company
for the purposes of the scheme, the trading company or group
has not carried on that trade for more than 7 years, and

(e) the scheme director condition is met.

(8) 45In this Chapter, the scheme director condition, in relation to an
investment scheme and a company, is that—

(a) the scheme (or the scheme and one or more investment schemes
acting together) are entitled to appoint a director (“the scheme
director”) of—

(i) the company, or

(ii) 5a company which controls the company, and

(b) the scheme director is entitled to exercise rights within
subsection (9).

(9) Those rights are rights which—

(a) are rights conferred under contractual arrangements—

(i) 10to which some or all of the investors in the company are
parties, and

(ii) which it would be reasonable to suppose would not
otherwise be capable of being exercised by the scheme
director,

(b) 15relate to the conduct of the business and affairs of the company,
and

(c) are at least equivalent to the rights which it is reasonable to
suppose a prudent investor would have obtained on making an
investment in the company at arm’s length of the same size and
20nature as that held in the company for the purposes of the
investment scheme.

(10) In determining whether the condition in subsection (2)(a) or (b) is met
in relation to a venture capital fund, any share capital of a company
which is held for the purposes of an associated investment scheme is to
25be regarded as held for the purposes of the venture capital fund.

809FZL Significant equity stake funds

(1) Where a significant equity stake fund has a significant equity stake
investment in a trading company or the holding company of a trading
group—

(a) 30any investment made for the purposes of the fund in that
company made after the time the significant equity stake
investment was acquired is to be regarded as having been made
at that time, and

(b) any disposal for the purposes of the fund of an investment in
35the company after that time is to be regarded as not being made
until—

(i) a relevant disposal is made, or

(ii) the scheme director condition ceases to be met.

(2) In subsection (1)(b) “relevant disposal” means a disposal which (apart
40from subsection (1)) has the effect that the significant equity stake fund
ceases to have a 15% interest in the company.

(3) In this Chapter, “significant equity stake fund” means an investment
scheme—

(a) which is not a venture capital fund, and

(b) 45in relation to which the condition in subsection (4) is met.

(4) The condition is that when the scheme starts to invest it is reasonable to
suppose that over the investing life of the scheme—

(a) more than 50% of the total value invested for the purposes of the
scheme will be invested in investments which are significant
equity stake investments, and

(b) more than 50% of that value will be invested in investments
5which are held for 40 months or more.

(5) In determining whether subsection (4)(b) is met in relation to an
investment scheme, apply the rule in subsection (1) to the scheme.

(6) In this section, “significant equity stake investment”, in relation to an
investment scheme, means an investment in a trading company or the
10holding company of a trading group where—

(a) at the time the investment is made, the company is unlisted and
likely to remain so,

(b) by virtue of the investment (on its own or with other
investments) the scheme has a 20% interest in the company, and

(c) 15the scheme director condition is met.

(7) For the purposes of this section, in determining whether a significant
equity stake fund has an interest of a particular percentage in a
company, any share capital of the company which is held for the
purposes of an associated investment scheme is to be regarded as held
20for the purposes of the significant equity stake fund.

809FZM Controlling equity stake funds

(1) Where a controlling equity stake fund has a 25% interest in a trading
company or the holding company of a trading group—

(a) any investment made for the purposes of the controlling equity
25stake fund in the company after the time the 25% interest was
acquired is to be regarded as having been made at that time, and

(b) any disposal for the purposes of the controlling equity stake
fund of an investment in the company after that time is to be
regarded as not being made until a relevant disposal is made.

(2) 30In subsection (1)(b), “relevant disposal”, in relation to a company,
means a disposal which (apart from subsection (1)) has the effect that
the controlling equity stake fund ceases to have a 25% interest in the
company.

(3) In this Chapter, “controlling equity stake fund” means an investment
35scheme—

(a) which is not a venture capital fund or significant equity stake
fund, and

(b) in relation to which the condition in subsection (4) is met.

(4) The condition is that when the scheme starts to invest it is reasonable to
40suppose that, over the investing life of the scheme—

(a) more than 50% of the total value invested for the purposes of the
scheme will be invested in investments which are controlling
interests in trading companies or holding companies of trading
groups, and

(b) 45more than 50% of the total value invested for the purposes of the
scheme will be invested in investments which are held for 40
months or more.

(5) In determining whether subsection (4)(b) is met in relation to an
investment scheme, apply the rule in subsection (1) to the scheme.

(6) For the purposes of this section, in determining whether a controlling
equity stake fund has a controlling interest or an interest of a particular
5percentage in a company, any share capital of the company which is
held for the purposes of an associated investment scheme is to be
regarded as held for the purposes of the controlling equity stake fund.

809FZN Real estate funds

(1) Where a real estate fund has a major interest in any land—

(a) 10any investment made for the purposes of the fund in that land
after the time the major interest was acquired is to be regarded
as having been made at that time, and

(b) any disposal for the purposes of the fund of an investment in
the land after that time is to be regarded as not being made until
15a relevant disposal is made.

(2) In subsection (1)(b) “relevant disposal” means a disposal which (apart
from subsection (1)) has the effect that the real estate fund has disposed
of more than 50% of the greatest amount invested at any one time in the
land for the purposes of the real estate fund.

(3) 20Where a real estate fund has a major interest in any land (“the original
land”) and subsequently acquires a major interest in any adjacent
land—

(a) the acquisition is an investment in the original land for the
purposes of subsection (1)(a), and

(b) 25after the acquisition, the adjacent land is to be regarded as part
of the original land for the purposes of subsections (1) and (2).

(4) In this Chapter, “real estate fund” means an investment scheme—

(a) which is not a venture capital fund, significant equity stake
fund or controlling equity stake fund, and

(b) 30in relation to which the condition in subsection (5) is met.

(5) The condition is that when the scheme starts to invest it is reasonable to
suppose that over the investing life of the scheme—

(a) more than 50% of the total value invested for the purposes of the
scheme will be invested in land, and

(b) 35more than 50% of the total value invested for the purposes of the
scheme will be invested in investments which are held for 40
months or more.

(6) In determining whether subsection (5)(b) is met in relation to an
investment scheme, apply the rule in subsection (1) to the scheme.

809FZO 40 Funds of funds

(1) Section 809FZC(5) (disregard of intermediate holdings and holding
structures) does not apply to an investment made for the purposes of a
fund of funds in a collective investment scheme (and, accordingly, such
an investment is regarded as an investment in the collective investment
45scheme itself).

(2) Subsection (1) does not apply in relation to a fund of funds in relation
to a collective investment scheme if it is reasonable to suppose that the
main purpose or one of the main purposes of the making of any
investment in any collective investment scheme for the purposes of the
5fund of funds is to reduce the proportion of carried interest arising to
any person which is income-based carried interest.

(3) Where by virtue of subsection (1) a fund of funds has a significant
investment in a collective investment scheme (“the underlying
scheme”)—

(a) 10any qualifying investment made for the purposes of the fund in
the underlying scheme after the time the significant investment
was acquired is to be regarded as having been made at that
time, and

(b) any disposal for the purposes of the fund of a qualifying
15investment in the underlying scheme after that time is to be
regarded as not being made until a relevant disposal is made.

(4) In subsection (3)(b) “relevant disposal”, in relation to an underlying
scheme, means a disposal which (apart from subsection (3)) has the
effect that—

(a) 20the fund of funds has (by virtue of disposals of its interest in the
underlying scheme) disposed of at least 50% of the greatest
amount invested for its purposes at any one time in the
underlying scheme, or

(b) the fund of fund’s investment in the underlying scheme is
25worth less than whichever is the greater of—

(i) £1 million, or

(ii) 5% of the total value of the investments made before the
disposal for the purposes of the fund of funds in the
underlying scheme.

(5) 30In this Chapter, “fund of funds” means an investment scheme in
relation to which the condition in subsection (6) is met.

(6) The condition is that when the scheme starts to invest it is reasonable to
suppose that over the investing life of the scheme—

(a) substantially all of the total value invested for the purposes of
35the scheme will be invested in collective investment schemes of
which the scheme holds less than 50% by value,

(b) more than 50% of the total value invested for the purposes of the
scheme will be invested in investments which are held for 40
months or more, and

(c) 40more than 75% of the total value invested in the scheme will be
invested by external investors.

(7) In determining whether subsection (6)(b) is met in relation to an
investment scheme, apply the rule in subsection (3) to the scheme.

(8) In this section, “significant investment”, in relation to a collective
45investment scheme, means—

(a) an investment of a least £1 million in the scheme, or

(b) an investment of at least 5% of the total amounts raised or to be
raised from external investors in the scheme.