IFM37600 | Interaction with Disguised Investment Management Fees rules

Interaction with Disguised Investment Management Fees rules

The disguised investment management fees (DIMF) rules (see IFM36100 onwards) are set out in Chapter 5E of Part 13 ITA 2007. Where common terms and concepts are used, they have the same meaning across both pieces of legislation.

The DIMF rules work with the carried interest legislation as a comprehensive structure for the two types of reward an investment manager may receive (IFM36120) from a fund whilst also dealing with any co-investment they make.

An individual performing investment management services in respect of arrangements set out in ITA07/S809EZA (IFM36200) will be taxed as follows:

• Management fees received will be charged to tax as income. Any planning to prevent this occurring will be caught by the DIMF rules.

• From 6 April 2016 the income based carried interest (IBCI) rules (IFM38000 onwards, reference currently not active - manual awaiting completion) came into effect. The IBCI rules dictate that the DIMF rules will apply to performance rewards from funds where the average holding period for investments is less than 40 months. A taper will be in place from 36 months. Any planning to avoid the IBCI rules will be caught by anti-avoidance provisions in the rules (ITA07/S809FZW).

• To the extent their performance-linked reward is not charged to income tax as trading income and any performance-linked interest in the fund vehicle is properly chargeable to capital gains tax, the carried interest rules at TCGA92/S103KA - S103KH ensure that the fund manager is charged to capital gains tax on the full amount of their economic gain.

• Where there is a genuine co-investment made by the individual fund manager on terms which are reasonably comparable to those investments made by external investors, the return on the co-investment will fall outside the remit of the DIMF rules and the carried interest rules. This return will be taxed in accordance with general principles.