Finance Bill (HC Bill 47)

(9) In this section, “qualifying investment” means an investment made for
the purposes of an investment scheme in a collective investment
scheme (“the underlying scheme”) where—

(a) the investment is held on the same terms as other investments
5made by external investors in the underlying scheme,

(b) the fund of funds, together with any connected funds, does not
hold more than 30% by value of the underlying scheme,

(c) the underlying scheme has not made an investment in the fund
of funds,

(d) 10no person providing investment management services to the
underlying scheme provides investment management services
to the fund of funds, and

(e) it is reasonable to suppose that the investment in the underlying
scheme is not part of arrangements the main purpose or one of
15the main purposes of which is to reward any person involved in
providing investment management services to the underlying
scheme or a scheme connected with that underlying scheme.

809FZP Secondary funds

(1) Section 809FZC(5) (disregard of intermediate holdings and holding
20structures) does not apply to investments acquired for the purposes of
a secondary fund in a collective investment scheme (and, accordingly,
such an investment is regarded as an investment in the collective
investment scheme itself).

(2) Subsection (1) does not apply in relation to a secondary fund in relation
25to 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
secondary fund is to reduce the proportion of carried interest arising to
any person which is income-based carried interest.

(3) 30Where by virtue of subsection (1) a secondary fund has a significant
investment in a collective investment scheme (“the underlying
scheme”)—

(a) any qualifying investment acquired for the purposes of the fund
in the underlying scheme after the time when the significant
35investment is 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
investment in the underlying scheme after that time is to be
regarded as not being made until a relevant disposal is made.

(4) 40In subsection (3)(b) “relevant disposal” means a disposal which (apart
from subsection (3)) has the effect that—

(a) the secondary fund 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
45underlying scheme, or

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

(i) £1 million, or

(ii) 5% of the total value of the investments held
immediately before the disposal for the purposes of the
secondary fund in the underlying scheme.

(5) In this Chapter, “secondary fund” means an investment scheme in
5relation 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
the scheme will be in the acquisition of investments in, or the
10acquisition of portfolios of investments from, unconnected
collective investment schemes,

(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) 15more than 75% of the total amount 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 interest”, in relation to a collective
20investment scheme, means—

(a) an investment of at 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.

(9) In this section, “qualifying investment” means an investment in a
25collective investment scheme (“the underlying scheme”) acquired for
the purposes of a secondary fund where—

(a) the investment acquired was originally made on the same terms
as investments in the underlying scheme made by external
investors,

(b) 30the terms on which the investment was acquired or investments
made in the underlying scheme were made by external
investors have not significantly changed since the investment
was acquired,

(c) the secondary fund, together with any connected funds, does
35not hold more than 30% by value of the underlying scheme,

(d) no person providing investment management services to the
underlying scheme provides investment management services
to the secondary fund, and

(e) it is reasonable to suppose that the investment in the underlying
40scheme is not part of arrangements the main purpose or one of
the main purposes of which is to reward any person involved in
providing investment management services to the underlying
scheme or a scheme connected with that underlying scheme.

Direct lending funds

809FZQ 45 Direct lending funds

(1) Carried interest arising from an investment scheme which is a direct
lending fund is income-based carried interest in its entirety.

Subsections (2) to (4) apply for the purposes of this Chapter.

(2) A direct lending fund is an investment scheme—

(a) which is not a venture capital fund, significant equity stake
5fund, controlling equity stake fund or real estate fund, and

(b) in relation to which it is reasonable to suppose that, when the
scheme ceases to invest, a majority of the investments made for
the purposes of the scheme (calculated by reference to value
invested) will have been direct loans made by the scheme.

(3) 10An investment scheme makes a direct loan if for the purposes of the
scheme money is advanced at interest or for any other return
determined by reference to the time value of money.

(4)
The acquisition of a direct loan is to be regarded as the making of a
direct loan if the loan is acquired within the period of 120 days
15beginning with the day on which the money is first advanced.

809FZR Direct lending funds: exception

(1) Section 809FZQ does not apply to carried interest arising from a direct
lending fund if—

(a) the fund is a limited partnership,

(b) 20the carried interest is a sum falling within section 809EZD(2) or
(3), and

(c) it is reasonable to suppose that, when investments cease to be
made for the purposes of the fund, at least 75% of the direct
loans made by the fund (calculated by reference to value
25advanced) will have been qualifying loans.

(2) In this section “qualifying loan” means a direct loan made by an
investment scheme where—

(a) the borrower is not connected with the investment scheme,

(b) the money is advanced under a genuine commercial loan
30agreement negotiated at arm’s length,

(c) repayments are fixed and determinable,

(d) maturity is fixed,

(e) the scheme has the positive intention and ability to hold the
loan to maturity, and

(f) 35the relevant term of the loan is at least four years.

(3) In this section “relevant term”, in relation to a loan, means the period
which—

(a) begins with the time when the money is advanced, and

(b) ends with the time by which, under the terms of the loan, at
40least 75% of the principal due under the loan must be repaid.

(4) For the purposes of determining the average holding period of a
scheme, where—

(a) a qualifying loan made by an investment scheme is repaid by
the borrower to any extent before the end of 40 months from the
45time the loan is made, and

(b) it is reasonable to suppose that the borrower’s decision to repay
was not affected by considerations relating to the application of
this Chapter,

the loan is, to the extent it is repaid by the borrower before the end of
40 months from the time it is made, to be treated as held for 40 months.

(5) In determining for the purposes of subsection (1)(b) whether a sum falls
within section 809EZD(2) or (3), read section 809EZD(4)(b) as if the
5reference to 6% were to 4%.

(6) Section 809FZB applies to carried interest to which, by virtue of
subsection (1), section 809FZQ does not apply.

Conditionally exempt carried interest

809FZS Conditionally exempt carried interest

(1) 10Carried interest which—

(a) arises to an individual from an investment scheme, and

(b) is conditionally exempt from income tax,

is to be treated as if it were not income-based carried interest to any
extent.

(2) 15Carried interest is conditionally exempt from income tax if Conditions
A to D are met.

(3) Condition A is that the carried interest arises to the individual in the
period of—

(a) four years beginning with the day on which the scheme starts to
20invest, or

(b) ten years beginning with that day if the carried interest is
calculated on the realisation model.

(4) Condition B is that the carried interest would, apart from this section,
be income-based carried interest to any extent.

(5) 25Condition C is that it is reasonable to suppose that, were the carried
interest to arise to the individual at the relevant time (but by reference
to the same relevant investments), it would not be income-based
carried interest to any extent.

(6) The “relevant time” is whichever is the earliest of—

(a) 30the time when it is reasonable to suppose that the investment
scheme will be wound up;

(b) the end of the period of four years beginning with the time
when it is reasonable to suppose that the scheme will cease to
invest;

(c) 35the end of the period of—

(i) four years beginning with the day on which the sum of
carried interest arises to the individual, or

(ii) ten years beginning with that day if the carried interest
was calculated on the realisation model;

(d) 40the end of the period of four years beginning with the end of the
period by reference to which the amount of the carried interest
was determined.

(7) Subsection (5) does not affect what would otherwise be the time at
which an investment is disposed of for the purposes of this Chapter.

(8) Condition D is that the individual makes a claim under this section for
the carried interest to be conditionally exempt from income tax.

809FZT Carried interest which ceases to be conditionally exempt

(1) Carried interest which is conditionally exempt from income tax ceases
5to be conditionally exempt from income tax at whichever is the earliest
of—

(a) the time when the investment scheme is wound up;

(b) the end of the period of four years beginning with the time the
scheme ceases to invest;

(c) 10the end of the period of—

(i) four years beginning with the day on which the sum of
carried interest arises to the individual, or

(ii) ten years beginning with that day if the carried interest
was calculated on the realisation model;

(d) 15the end of the period of four years beginning with the end of the
period by reference to which the amount of the carried interest
is determined;

(e) the time at which Condition C in section 809FZS(5) ceases to be
met.

(2) 20Carried interest which ceases to be conditionally exempt from income
tax is to be treated as having been income-based carried interest at the
time it arose to the individual if or to the extent that, had it arisen to the
individual at the time it ceased to be conditionally exempt (but in
relation to the same relevant investments) it would have been income-
25based carried interest.

(3) All such assessments and adjustments of assessments are to be made as
are necessary to give effect to subsection (2).

(4) Any amount paid by way of capital gains tax in respect of carried
interest which is conditionally exempt from income tax is to be treated
30as if it had been paid in respect of any income tax liability arising under
subsection (2).

Supplementary

809FZU Employment-related securities

This Chapter does not apply in relation to carried interest arising to an
35individual in respect of employment-related securities as defined by
section 421B(8) of ITEPA 2003.

809FZV “Loan to own” investments

(1) This section applies where—

(a) an investment scheme acquires a debt,

(b) 40the debt is to any extent uncollectable or otherwise impaired,

(c) the debt is acquired at a discount with a view to securing direct
or indirect ownership of any assets which are—

(i) owned by a company which is the debtor in respect of
the debt, or

(ii) 45subject to a security interest in respect of the debt, and

(d) the fund acquires ownership of the assets within three months
of the acquisition of the debt.

(2) For the purposes of this Chapter—

(a) the debt and the assets are to be treated as a single investment,
5and

(b) the value invested in that single investment is the amount paid
for the debt.

(3) In this section “security interest” means an interest or right (other than
a rentcharge) held for the purpose of securing the payment of money or
10the performance of any obligation.

809FZW Anti-avoidance

(1) For the purposes mentioned in subsection (2), no regard is to be had to
any arrangements the main purpose of which, or one of the main
purposes of which, is to reduce the proportion of carried interest which
15is income-based carried interest.

(2) The purposes referred to in subsection (1) are—

(a) determining the average holding period, or

(b) determining whether an investment scheme is a venture capital
fund, significant equity stake fund, controlling equity stake
20fund, real estate fund, fund of funds or secondary fund.

(3) In determining to what extent carried interest is income-based carried
interest, no regard is to be had to any arrangements the main purpose,
or one of the main purposes, of which is to secure that section
809EZA(1) (charge to income tax) does not apply in relation to some or
25all of the carried interest.

809FZX Treasury regulations

(1) The Treasury may by regulations make—

(a) provision relating to the calculation of the average holding
period in some or all cases;

(b) 30provision repealing, or restricting the application of, section
809FZU (employment-related securities).

(2) The provision referred to in subsection (1)(a) includes in particular—

(a) provision for a method of calculating that period which is
different from that in section 809FZC;

(b) 35provision as to what is and is not to be regarded as an
investment;

(c) provision as to when an investment is to be regarded as made
or disposed of;

(d) anti-avoidance provision.

(3) 40Regulations under this section may—

(a) amend this Chapter;

(b) make different provision for different purposes;

(c) contain incidental, supplemental, consequential and
transitional provision and savings.

809FZY “Reasonable to suppose”

(1) For the purposes of this Chapter, in determining what it is reasonable
to suppose in relation to an investment scheme, regard is to be had to
all the circumstances.

(2) 5Those circumstances include in particular any prospectus or other
document which—

(a) is made available to external investors in the investment
scheme, and

(b) on which external investors may reasonably be supposed to
10have relied or been able to rely.

Interpretation

809FZZ Interpretation of Chapter 5F

(1) In this Chapter—

• “5% interest”, “15% interest”, “20% interest”, “25% interest” and
  15“40% interest” are to be construed in accordance with
  subsection (4);

• “act together”: two or more investment schemes act together in
  relation to a company if—

  (a)

  they enter into contractual arrangements (with or
  20without other persons) in relation to the conduct of the
  company’s affairs,

  (b)

  the arrangements are negotiated on arm’s length terms,
  and

  (c)

  the investment schemes act together to secure greater
  25control or influence over the company’s affairs than
  they would be able to secure individually;

• “alternative finance arrangements” has the same meaning as in
  Part 6 of CTA 2009 (see section 501(2) of that Act);

• “arrangements” has the same meaning as in Chapter 5E (see
  30section 809EZE);

• “associated”: two (or more) investment schemes are “associated
  if—

  (a)

  the same or substantially the same individuals provide
  investment management services to both schemes;

  (b)

  35the investment schemes have the same or substantially
  the same investments, and

  (c)

  the schemes act together in relation to all or
  substantially all of the investments they acquire;

• “carried interest” has the same meaning as in section 809EZB (see
  40sections 809EZC and 809EZD);

• “collective investment scheme” has the same meaning as in
  Chapter 5E (see section 809EZE);

• “connected” and “unconnected” are to be construed in accordance
  with subsections (6) and (7);

• 45“contract for differences” has the same meaning as in Part 7 of
  CTA 2009 (see section 582 of that Act);

• “controlling equity stake fund” has the meaning given in section
  809FZM;

Finance BillPage 77

• “controlling interest” has the meaning given in subsection (3);

• “derivative contract” has the same meaning as in Part 7 of CTA
  2009 (but see below);

• “designated” has the same meaning as for accounting purposes;

• 5“direct lending fund” and “direct loan” have the meanings given
  in section 809FZQ;

• “exchange gain or loss” is to be construed in accordance with
  section 475 of CTA 2009;

• “external investor” has the same meaning as in Chapter 5E (see
  10section 809EZE);

• “fund of funds” has the meaning given in section 809FZO;

• “future” has the same meaning as in Part 7 of CTA 2009 (see
  section 581 of that Act);

• “interest rate contract” means—

  (a)

  15a derivative contract whose underlying subject-matter
  is, or includes, interest rates, or

  (b)

  a swap contract in which payments fall to be made by
  reference to a rate of interest;

• “investing life” is to be construed in accordance with subsection
  20(2);

• “investment” does not include—

  (a)

  cash awaiting investment, or

  (b)

  cash representing the proceeds of the disposal of an
  investment, where the cash is to be distributed as soon
  25as reasonably practicable to investors in the scheme;

• “investment scheme” has the same meaning as in Chapter 5E (see
  section 809EZA(6));

• “limited partnership” means—

  (a)

  a limited partnership registered under the Limited
  30Partnerships Act 1907,

  (b)

  a limited liability partnership formed under the Limited
  Liability Partnerships Act 2000 or the Limited Liability
  Partnerships Act (Northern Ireland) 2002 (c.12 (N.I.)), or

  (c)

  a firm or entity of a similar character to any of those
  35mentioned in paragraph (a) or (b) formed under the law
  of a country or territory outside the United Kingdom;

• “loan relationship” has the meaning given by section 302 of CTA
  2009 (but see below);

• “major interest”, in relation to land, has the meaning given by
  40section 96 of the Value Added Tax Act 1994;

• “option” has the same meaning as in Part 7 of CTA 2009,
  disregarding section 580(2) of that Act;

• “real estate fund” has the meaning given by section 809FZN;

• “realisation model”: a sum of carried interest is calculated on the
  45“realisation model” if it falls within section 809EZD(2) or (3)
  (disregarding section 809EZD(2)(b) and (3)(b));

• “scheme director condition” has the meaning given by section
  809FZK(8) and (9);

• “secondary fund” has the meaning given by section 809FZP;

• 50“significant equity stake fund” has the meaning given by section
  809FZL;

Finance BillPage 78

• “sum” has the same meaning as in Chapter 5E (see section
  809EZB(3));

• “trading company” and “trading group” have the meanings given
  by paragraphs 20 and 21 of Schedule 7AC to TCGA 1992;

• 5“underlying subject matter” has the same meaning as in Part 7 of
  CTA 2009;

• “unlisted”: a company is unlisted if—

  (a)

  no shares of any class issued by the company are listed
  on any stock exchange, and

  (b)

  10there are no other trading arrangements in place in
  respect of shares of any class issued by the company;

• “venture capital fund” has the meaning given by section 809FZK.

(2) In this Chapter—

(a) references to when a scheme starts or ceases to invest are to the
15time when investments start or cease to be made for the
purposes of the scheme, and

(b) references to the investing life of the scheme are to the time
between when a scheme starts and ceases to invest.

(3) For the purposes of this Chapter, an investment scheme has a
20controlling interest in a company if share capital of the company is held
for the purposes of the scheme which—

(a) amounts to more than 50% of the ordinary share capital of the
company, and

(b) carries an entitlement to more than 50% of—

(i) 25voting rights in the company,

(ii) profits available for distribution to shareholders, and

(iii) assets of the company available for distribution to
shareholders in a winding-up.

(4) For the purposes of this Chapter, an investment scheme has an interest
30of a particular percentage in a company (for example, a 40% interest) if
share capital of the company is held for the purposes of the scheme
which—

(a) amounts to at least that percentage of the ordinary share capital
of the company, and

(b) 35carries an entitlement to at least that percentage of—

(i) voting rights in the company,

(ii) profits available for distribution to shareholders, and

(iii) assets of the company available for distribution to
shareholders in a winding-up.

(5) 40For the purposes of subsections (3) and (4) any share capital held by a
company controlled by an investment scheme is to be regarded as held
for the purposes of the investment scheme.

(6) For the purposes of this Chapter, an investment scheme (A) is
connected with another investment scheme or person (B) if—

(a) 45A directly or indirectly has control of B, or

(b) the same person, directly or indirectly, has control of A and B.

(7) For the purposes of subsection (6) “control”—

(a) in the case of control of a company, is to be read in accordance
with sections 450 and 451 of CTA 2010;

(b) in the case of control of a partnership, has the meaning given in
section 995(3);

(c) 5in the case of control of an investment scheme which is not a
company or partnership, or of any other person which is not a
company or partnership, means the ability to secure that the
affairs of that scheme or other person are conducted in
accordance with one’s wishes.

(8) 10For the purposes of the definition of “derivative contract”, read Part 7
of CTA 2009 as if—

(a) references to a company were references to an investment
scheme, and

(b) references to a contract of a company were references to a
15contract for the purposes of an investment scheme.

(9) For the purposes of the definition of “loan relationship”, read Part 5 of
CTA 2009 as if—

(a) references to a company were references to an investment
scheme, and

(b) 20references to a loan relationship of a company were references
to a loan relationship for the purposes of an investment
scheme.””

(3) In section 2 of ITA 2007 (overview), in subsection (13), after paragraph (hb)
insert—

“(hc) 25income-based carried interest (Chapter 5F),”.”

(4) The amendments made by this section have effect in relation to sums of carried
interest arising on or after 6 April 2016 (whenever the arrangements under
which the sums arise were made).

38 Income-based carried interest: persons coming to the UK

(1) 30In section 809EZA of ITA 2007 (disguised investment management fees: charge
to income tax), after subsection (2) insert—

“(2A) Subsection (2B) applies instead of subsections (1) and (2) where—

(a) one or more disguised fees arise to an individual in a tax year
(“the relevant tax year”) from one or more investment schemes
35(whether or not by virtue of the same arrangements),

(b) the disguised fees consist of carried interest which is income-
based carried interest,

(c) the individual is UK resident in the relevant tax year,

(d) before the relevant tax year, the individual was not UK resident
40for a period of at least five consecutive tax years (“the period of
non-residence”), and

(e) either—

(i) the relevant tax year is the first tax year immediately
after the end of the period of non-residence, or

(ii) 45the relevant tax year is the second, third, or fourth tax
year after the end of that period and the individual has
been UK resident in all the intervening tax years.