IFM36510 - Carried interest and profit related returns: Introduction

Introduction

ITA07/S809EZC & S809EZD

The term ‘carried interest’ generally refers to a share of the profits which arise to managers of the fund where the investments in a fund perform above a certain level. The disguised investment management fees (DIMF) rules introduced a statutory definition of carried interest at ITA07/S809EZC.

From 6 April 2016 amounts of carried interest that arise from funds which do not hold their assets for 40 months or more can be classed as income based carried interest and will be charged to tax as income under the DIMF rules (Chapter 5F of Finance Act 2016) (see IFM380000 onwards. Reference currently not active - manual awaiting completion)

Amounts of “non-income based” carried interest will fall outside the scope of the DIMF rules (and therefore be eligible for capital gains treatment), provided one of two definitions of carried interest is met:

  • ITA07/S809EZC: definition of carried interest.
  • ITA07/S809EZD: defines amounts which are ‘treated as carried interest’.

Where carried interest arrangements fall within ITA07/S809EZD, these carried interest sums will be exempt from the DIMF rules as amounts ‘treated as carried interest’.