Schedule A1 | Carried Interest: interpretation of key terms ^F1

Part 1Meaning of carried interest^F1

(1)A sum (including a sum in the form of a loan or advance or an allocation of profits) which arises to an individual from an investment scheme under arrangements is “carried interest” if it arises by way of profit-related return.^F1

(2)A sum which arises to an individual from an investment scheme under arrangements does so by way of “profit-related return” if under the arrangements—^F1

(a)the sum is to, or may, arise only if—^F1

(i)there are profits for a period on the investments, or on particular investments, made for the purposes of the scheme, or^F1

(ii)there are profits arising from a disposal of the investments, or of particular investments, made for those purposes,^F1

(b)the amount of the sum which is to, or may, arise is variable, to a substantial extent, by reference to those profits, and^F1

(c)returns to external investors are also determined by reference to those profits;^F1

but where any part of the sum does not meet these conditions, that part is not to be regarded as arising by way of “profit-related return”.

(3)But where—^F1

(a)one or more sums (“actual sums”) arise to an individual from an investment scheme under the arrangements by way of profit-related return in a tax year, and^F1

(b)there was no significant risk that a sum of at least a certain amount (“the minimum amount”) would not arise to the individual from that scheme,^F1

so much of the actual sum, or of the aggregate of the actual sums, as is equal to the minimum amount is not “carried interest”.(See sub-paragraphs (7) and (8) as to how the minimum amount is to be apportioned between the actual sums where more than one actual sum arises in the tax year.)

(4)For the purposes of sub-paragraph (3)(b) assess the risk both—^F1

(a)in relation to each actual sum (and the investments to which it relates) individually, taking into account also any other sums that might have arisen to the individual from that scheme under the arrangements instead of that sum, and^F1

(b)in relation to the actual sum or sums and any other sums that might have arisen to the individual from that scheme under the arrangements by way of profit-related return in the tax year (and the investments to which all those sums relate) taken as a whole;^F1

(so that, in a particular case, some of the minimum amount may arise by assessing the risk in accordance with paragraph (a) and some by assessing it in accordance with paragraph (b)).

(5)For the purposes of sub-paragraph (3)(b) assess the risk as at the latest of—^F1

(a)the time when the individual becomes party to the arrangements,^F1

(b)the time when the individual begins to perform investment management services directly or indirectly in respect of an investment scheme under the arrangements, and^F1

(c)the time when a material change is made to the arrangements so far as relating to the sums which are to, or may, arise to the individual.^F1

(6)For the purposes of sub-paragraph (3)(b) ignore any risk that a sum is prevented from arising to the individual (by reason of insolvency or otherwise).^F1

(7)Where more than one actual sum arises in the tax year, the minimum amount is to be apportioned between the actual sums as follows for the purposes of sub-paragraph (3)—^F1

(a)so much of the minimum amount as is attributable to a particular actual sum is to be apportioned to that actual sum, and^F1

(b)so much of the minimum amount as is not attributable to any particular actual sum is to be apportioned between the actual sums on a just and reasonable basis.^F1

(8)For the purpose of sub-paragraph (7) any part of the minimum amount is attributable to a particular actual sum to the extent that there was no significant risk that that part would not arise to the individual in relation to that actual sum, assessing the risk in accordance with sub-paragraph (4)(a).^F1

(9)See also paragraphs 2 to 5 which set out when certain sums are to be treated and not treated as carried interest.^F1

(1)A sum arising to an individual from an investment scheme under arrangements which falls within sub-paragraph (2) or (3)—^F1

(a)is to be assumed to meet the conditions in paragraph 1(2),^F1

(b)is to be assumed to not be a sum in relation to which paragraph 1(3) applies, and^F1

(c)accordingly, is to be treated as constituting “carried interest”.^F1

(2)A sum falls within this sub-paragraph if, under the arrangements, it is to, or may, arise to the individual out of profits on the investments made for the purposes of the scheme, but only after—^F1

(a)all, or substantially all, of the investments in the scheme made by the participants have been repaid to the participants, and^F1

(b)each external investor has received a preferred return on all, or substantially all, of the investor's investments in the scheme.^F1

(3)A sum falls within this sub-paragraph if, under the arrangements, it is to, or may, arise to the individual out of profits on a particular investment made for the purposes of the scheme, but only after—^F1

(a)all, or substantially all, of the relevant investments made by participants have been repaid to those participants, and^F1

(b)each of those participants who is an external investor has received a preferred return on all, or substantially all, of the investor's relevant investments;^F1

and for this purpose “relevant investments” means those investments in the scheme to which the particular investment made for the purposes of the scheme is attributable.

(4)In this paragraph “preferred return” means a return of not less than the amount that would be payable on the investment by way of interest if—^F1

(a)compound interest were payable on the investment for the whole of the period during which it was invested in the scheme, and^F1

(b)the interest were calculated at a rate of 6% per annum, with annual rests.^F1

(1)Sub-paragraph (2) applies to consideration that is received or receivable—^F1

(a)by an individual for the disposal, variation, loss or cancellation of the individual’s right to a sum arising from an investment scheme under arrangements by way of profit-related return, or^F1

(b)by a person who is a relevant person in relation to the individual, for the disposal, variation, loss or cancellation of the relevant person’s right to a sum arising from an investment scheme under arrangements by way of profit-related return.^F1

(2)The consideration, to the extent that it is not a disguised fee arising to the individual for the purposes of section 809EZA of ITA 2007—^F1

(a)is to be treated as a sum which arises to the individual from the scheme under the arrangements by way of profit-related return at the time of the disposal, variation, loss or cancellation, and^F1

(b)accordingly, is to be treated as constituting “carried interest”.^F1

(3)For the purposes of sub-paragraph (1), a person is a “relevant person” in relation to an individual if carried interest arising to that person would be treated as arising to the individual for the purposes of section 23I (see paragraph 7 and paragraph 8 of this Schedule).^F1

(1)A tax distribution arising to an individual from an investment scheme under arrangements is to be treated as constituting “carried interest”.^F1

(2)A sum which arises to an individual from an investment scheme under arrangements is a “tax distribution” if—^F1

(a)under the arrangements the sum is to, or may, arise only if tax (including non-UK tax within the meaning of Part 5 of CTA 2010) becomes payable or is expected to become payable as a result of any individual’s entitlement to carried interest under the arrangements, and^F1

(b)the sum arising to the individual results in a corresponding deduction in the individual’s entitlement to carried interest.^F1

(1)A sum which arises to an individual from an investment scheme under arrangements by way of profit-related return is not to be treated as “carried interest” to the extent that it constitutes a co-investment repayment or return.^F1

(2)In sub-paragraph (1)—^F1

“co-investment”, in relation to an individual and a scheme, means an investment made directly or indirectly by the individual, or a person who is connected with the individual, in the scheme, where there is no return on the investment which is not an arm's length return within the meaning of section 809EZB(2) of ITA 2007;

“co-investment repayment or return” means a repayment in whole or in part of, or a return on, a co-investment.

(3)Section 993 of ITA 2007 (meaning of “connected”) applies for the purposes of this paragraph but as if—^F1

(a)subsection (4) of that section were omitted, and^F1

(b)partners in a partnership in which the individual is also a partner were not “associates” of the individual for the purposes of sections 450 and 451 of CTA 2010 (“control”).^F1

(1)In this Part of this Schedule, “profits”, in relation to an investment made for the purposes of an investment scheme, means profits (including unrealised profits) arising from the acquisition, holding, management or disposal of the investment (taking into account items of a revenue nature and items of a capital nature).^F1

(2)In this Part of this Schedule a reference to an investment made by a person in an investment scheme is a reference to a contribution by the person (whether by way of capital, loan or otherwise) towards the property subject to the scheme (but does not include a sum committed but not yet invested).^F1

(3)For the purposes of sub-paragraph (2) a person who holds a direct or indirect interest in an investment scheme and who acquired the interest from a person other than the scheme is to be taken to have made a contribution towards the property subject to the scheme equal to—^F1

(a)the consideration given by the person for the acquisition of the interest, or^F1

(b)if less, the market value within the meaning of the TCGA 1992 (see sections 272 and 273 of that Act) of the interest at the time of the acquisition.^F1

(4)In this Part of this Schedule, in relation to an investment scheme which is a company limited by shares—^F1

(a)references to a repayment of, or a return on, an investment in the scheme include a repayment of, or a return on, an investment represented by a share in the scheme resulting from—^F1

(i)the purchase of the share by the scheme,^F1

(ii)the redemption of the share by the scheme,^F1

(iii)the distribution of assets in respect of the share on the winding up of the scheme, or^F1

(iv)any similar process;^F1

(b)references to a return on an investment in the scheme include a dividend or similar distribution in respect of a share in the scheme representing the investment.^F1

Part 2Sums arising to other persons treated as arising to the individual^F1

(1)This paragraph applies in relation to an individual (“A”) if—^F1

(a)a sum arises to a person (“B”) who is connected with A,^F1

(b)B is not a company, and^F1

(c)the sum does not arise to A apart from this paragraph.^F1

(2)The sum referred to in sub-paragraph (1)(a) arises to A for the purposes of this Schedule and this group of sections.^F1

(3)Where a sum arises to A by virtue of this paragraph, it arises to A at the time the sum referred to in sub-paragraph (1)(a) arises to B.^F1

(4)Section 993 of ITA 2007 (meaning of “connected”) applies for the purposes of this paragraph but as if—^F1

(a)subsection (4) of that section were omitted, and^F1

(b)partners in a partnership in which A is also a partner were not “associates” of A for the purposes of sections 450 and 451 of CTA 2010 (“control”).^F1

(1)This paragraph applies in relation to an individual (“A”) if—^F1

(a)a sum arises to—^F1

(i)a company connected with A, or^F1

(ii)a person not connected with A,^F1

(b)any of the enjoyment conditions are met, and^F1

(c)the sum does not arise to A apart from this paragraph.^F1

(2)The enjoyment conditions are—^F1

(a)the sum, or part of the sum, is in fact so dealt with by any person as to be calculated at some time to enure for the benefit of A or a person connected with A;^F1

(b)the arising of the sum operates to increase the value to A or a person connected with A of any assets which—^F1

(i)A or the connected person holds, or^F1

(ii)are held for the benefit of A or the connected person;^F1

(c)A or a person connected with A receives or is entitled to receive at any time any benefit provided or to be provided out of the sum or part of the sum;^F1

(d)A or a person connected with A may become entitled to the beneficial enjoyment of the sum or part of the sum if one or more powers are exercised or successively exercised (and for these purposes it does not matter who may exercise the powers or whether they are exercisable with or without the consent of another person);^F1

(e)A or a person connected with A is able in any manner to control directly or indirectly the application of the sum or part of the sum.^F1

In this sub-paragraph, in a case where the sum referred to in sub-paragraph (1)(a) arises to a company connected with A, references to a person connected with A do not include that company.

(3)There arises to A for the purposes of this Schedule and this group of sections—^F1

(a)the sum referred to in sub-paragraph (1)(a), or^F1

(b)if the enjoyment condition in sub-paragraph (2)(a), (c), (d) or (e) is met in relation to part of the sum, that part of that sum, or^F1

(c)if the enjoyment condition in sub-paragraph (2)(b) is met, such part of that sum as is equal to the amount by which the value of the assets referred to in that condition is increased.^F1

(4)Where a sum (or part of a sum) arises to A by virtue of this paragraph, it arises to A at the time it arises to the person referred to in sub-paragraph (1)(a)(i) or (ii) (whether the enjoyment condition was met at that time or at a later date).^F1

(5)In determining whether any of the enjoyment conditions are met in relation to a sum or part of a sum—^F1

(a)regard must be had to the substantial result and effect of all the relevant circumstances, and^F1

(b)all benefits which may at any time accrue to a person as a result of the sum arising as specified in sub-paragraph (1)(a) must be taken into account, irrespective of—^F1

(i)the nature or form of the benefits, or^F1

(ii)whether the person has legal or equitable rights in respect of the benefits.^F1

(6)The enjoyment condition in sub-paragraph (2)(b), (c) or (d) is to be treated as not met if it would be met only by reason of A or a person connected with A holding shares or an interest in shares in a company.^F1

(7)The enjoyment condition in sub-paragraph (2)(a) or (e) is to be treated as not met if the sum referred to in sub-paragraph (1)(a) arises to a company and—^F1

(a)the company is liable to pay corporation tax in respect of its profits and the sum is included in the computation of those profits, or^F1

(b)sub-paragraph (a) does not apply but—^F1

(i)the company is a CFC and the exemption in Chapter 14 of Part 9A of TIOPA 2010 applies for the accounting period in which the sum arises, or^F1

(ii)the company is not a CFC but, if it were, that exemption would apply for that period.^F1

In this sub-paragraph “CFC” has the same meaning as in Part 9A of TIOPA 2010.

(8)But sub-paragraphs (6) and (7) do not apply if the sum referred to in sub-paragraph (1)(a) arises to the company referred to in sub-paragraph (1)(a)(i) or the person referred to in sub-paragraph (1)(a)(ii) as part of arrangements where—^F1

(a)it is reasonable to assume that in the absence of the arrangements the sum or part of the sum would have arisen to A or an individual connected with A, and^F1

(b)it is reasonable to assume that the arrangements have as their main purpose, or one of their main purposes, the avoidance of a liability to pay income tax, capital gains tax, inheritance tax or corporation tax.^F1

(9)The condition in sub-paragraph (8)(b) is to be regarded as met in a case where—^F1

(a)the sum arose from an investment scheme,^F1

(b)the sum is applied directly or indirectly as an investment in an investment scheme, and^F1

(c)the persons providing investment management services to the schemes mentioned in paragraphs (a) and (b) are the same or substantially the same.^F1

(10)Section 993 of ITA 2007 (meaning of “connected”) applies for the purposes of this paragraph, but as if—^F1

(a)subsection (4) of that section were omitted, and^F1

(b)partners in a partnership in which A is also a partner were not “associates” of A for the purposes of sections 450 and 451 of CTA 2010 (“control”).^F1

(1)But paragraph 8 does not apply in relation to a sum arising to—^F1

(a)a company connected with A, or^F1

(b)a person not connected with A,^F1

for as long as the sum is a deferred sum in relation to A.

(2)In this paragraph, “deferred sum”, in relation to A—^F1

(a)means a sum where the provision of the sum to A or a person connected with A is deferred (whether pending the meeting of any conditions (including conditions which may never be met) or otherwise), and^F1

(b)includes A's share (as determined on a just and reasonable basis) of any sum the provision of which to A and one or more other persons, taken together, has been deferred (whether pending the meeting of any conditions (including conditions which may never be met) or otherwise).^F1

In this sub-paragraph, in a case where the sum referred to in sub-paragraph (1) arises to a company connected with A, the reference to a person connected with A does not include that company.

(3)Where—^F1

(a)paragraph 8 has been disapplied in relation to a deferred sum by virtue of sub-paragraph (1), and^F1

(b)the sum ceases to be a deferred sum in relation to A,^F1

the sum is to be regarded as arising to the company or person mentioned in sub-paragraph (1) at the time it ceases to be a deferred sum.

(4)Section 993 of ITA 2007 (meaning of “connected”) applies for the purposes of this paragraph but as if—^F1

(a)subsection (4) of that section were omitted, and^F1

(b)partners in a partnership in which A is also a partner were not “associates” of A for the purposes of sections 450 and 451 of CTA 2010 (“control”).^F1

(5)A sum which is deferred carried interest within the meaning of section 103KG(3) of TCGA 1992 when this paragraph comes into force is to be treated for the purposes of sub-paragraph (3) as a deferred sum in relation to which paragraph 8 has been disapplied virtue of sub-paragraph (1).^F1

(1)Paragraph 9 does not apply in relation to any sum in relation to which the condition in sub-paragraph (8)(b) of paragraph 8 is met by virtue of sub-paragraph (9) of that paragraph.^F1

(2)Paragraph 9 also does not apply if—^F1

(a)it is reasonable to assume that the deferral referred to in sub-paragraph (2) of paragraph 9 is not the effect of genuine commercial arrangements, or^F1

(b)that deferral is the effect of such arrangements but it is reasonable to assume that the arrangements have as their main purpose, or one of their main purposes, the avoidance of a liability to pay income tax, capital gains tax, corporation tax or inheritance tax.^F1

(3)In sub-paragraph (2), “genuine commercial arrangements” means arrangements involving A (alone or jointly with others performing investment management services) and external investors in the investment scheme.^F1

Part 3Qualifying carried interest^F1

Chapter 1Qualifying carried interest^F1

(1)This Part of this Schedule determines when carried interest arising to an individual from an investment scheme is “qualifying carried interest” for the purposes of section 23I.^F1

(2)Paragraph 12 contains the general rule, under which the extent to which carried interest is qualifying carried interest depends on the average holding period of the investment scheme.^F1

(3)Chapters 2 to 5 of this Part contain further provision relating to average holding periods.^F1

(4)Chapter 6 contains an exception to the general rule for carried interest which is treated as being 100% qualifying carried interest.^F1

(5)Chapters 7 and 8 contain supplementary and interpretative provision.^F1

(6)Nothing in this Part of this Schedule affects the liability to any tax of—^F1

(a)the investment scheme, or^F1

(b)external investors in the investment scheme.^F1

(1)“Qualifying carried interest” is the relevant proportion of a sum of carried interest arising to an individual from an investment scheme.^F1

(2)The relevant proportion is determined by reference to the investment scheme's average holding period as follows.^F1

(3)This paragraph is subject to the following provisions of this Part of this Schedule.^F1

Chapter 2Average holding period^F1

(1)The average holding period of an investment scheme, in relation to a sum of carried interest, is the average length of time for which relevant investments have been held for the purposes of the scheme.^F1

(2)In this paragraph, “relevant investments” means investments—^F1

(a)which are made for the purposes of the scheme, and^F1

(b)by reference to which the carried interest is calculated.^F1

(3)The average holding period is calculated by reference to the time the carried interest arises.^F1

(4)It is calculated as follows.^F1

Step 1 For each relevant investment, multiply the value invested at the time the investment was made by the length of time for which the investment has been held.

Step 2 Add together the amounts produced under step 1 in respect of all relevant investments.

Step 3 Divide the amount produced under step 2 by the total value invested in all relevant investments.

(5)Disregard intermediate holdings or intermediate holding structures (including intermediate investment schemes) by or through which investments are made or held—^F1

(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^F1

(b)for any other purpose relating to the determination of the average holding period.^F1

This is subject to the following provisions of this Part of this Schedule.

(6)In this paragraph references to the length of time for which a relevant investment has been held are—^F1

(a)in 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^F1

(b)in any other case, references to the time for which it has been held up to the time the carried interest arises.^F1

(7)For the purposes of this Part of this Schedule a sum which is a deferred sum in relation to an individual within the meaning of paragraph 9 of this Schedule is to be treated as arising to that individual at the time it would have arisen had it not been deferred as specified in paragraph 9(2)(a) or (b).^F1

(8)Chapters 3 to 5 of this Part of this Schedule apply for the purposes of determining the average holding period of an investment scheme.^F1

(9)In those Chapters—^F1

(a)references to the value invested for the purposes of an investment scheme in investments are to the value invested at the time the investments were made, and^F1

(b)references to the base amount held in investments for the purposes of an investment scheme at any time are to the value invested for the purposes of the scheme (within the meaning of paragraph (a)) in the investments that are held for the purposes of the scheme at that time.^F1

Chapter 3Average holding period: making and disposals of investments^F1

(1)An investment made by acquiring an asset disposed of under a contract is made when the asset is acquired for the purposes of TCGA 1992 (see section 28 of that Act).^F1

(2)An investment in newly issued shares is made when the shares are issued.^F1

(1)An investment or part of an investment is disposed of where—^F1

(a)there is a disposal of the investment or the part of the investment for the purposes of the investment scheme,^F1

(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 which the investment is held, or^F1

(c)in any other case, there is a deemed disposal under sub-paragraph (2).^F1

(2)There is a deemed disposal of an investment or part of an investment under this sub-paragraph where—^F1

(a)under any arrangements—^F1

(i)the scheme in substance closes its position on the investment or the part of the investment, or^F1

(ii)the scheme ceases to be exposed to risks and rewards in the respect of the investment or the part of the investment, and^F1

(b)it is reasonable to assume that the arrangements were designed to secure that result.^F1

(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 which 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).^F1

(4)The references in sub-paragraph (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 sub-paragraph (1)(a) disregard section 116 of TCGA 1992 (which disapplies sections 127 to 130 of that Act in relation to qualifying corporate bonds).^F1

(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.^F1

(2)The value of each of those two separate investments is the appropriate proportion of the value first invested in the whole investment.^F1

(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.^F1

(4)The 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).^F1

(1)This paragraph applies where an investment scheme (“the acquiring scheme”) acquires an investment on its disposal by an associated investment scheme.^F1

(2)The investment is treated as made by the acquiring scheme when it was made by the associated investment scheme.^F1

(3)The disposal of the investment by the associated investment scheme is to be disregarded.^F1

(1)The making and disposal of an investment or part of an investment for the purposes of an investment scheme are to be disregarded if the investment or part of the investment is an unwanted short-term investment.^F1

(2)An investment or part of an investment is an unwanted short-term investment to the extent that—^F1

(a)the investment or part investment is made as part of a transaction under which investments are made for the purposes of the scheme,^F1

(b)the value of the investment or part investment does not exceed 50% of the total value of the investments made for the purposes of the scheme by the transaction,^F1

(c)it is reasonable to assume that the investment or part investment had to be made in order for the investments to be made,^F1

(d)at the time of the transaction, managers of the scheme have a firm, settled and evidenced intention to dispose of the investment or part investment for the purposes of the scheme within 12 months,^F1

(e)the investment or part investment is disposed of for the purposes of the scheme (whether or not within 12 months), and^F1

(f)any profit resulting from the disposal has no significant bearing on whether a sum of carried interest arises or on the amount of any sum of carried interest which does arise.^F1

(1)In this Part of this Schedule, “debt investment” means an investment in an asset representing a loan relationship or a relevant non-lending relationship (but see paragraph 29(6)(a)).^F1

(2)Sub-paragraph (3) applies where an investment in an asset representing a loan relationship is made for the purposes of an investment scheme by money being advanced.^F1

(3)The debt investment in the asset representing the loan relationship is to be treated as having been made when there was an unconditional obligation to advance the money.^F1

(4)For the purposes of sub-paragraph (3), an obligation is not to be regarded as conditional by reason only that it was contingent on one or more of the following conditions—^F1

(a)a condition the fulfilment of which was outside the control of the scheme or any person connected with the scheme;^F1

(b)a condition that it is reasonable to assume a prudent investor would have obtained on making an investment at arm's length of the same size and nature as the debt investment.^F1

(5)For the purposes of sub-paragraph (4), an investment scheme is connected with another person if—^F1

(a)the scheme directly or indirectly has control of the person, or^F1

(b)the same person, directly or indirectly, has control of the scheme and the person.^F1

(6)For the purposes of sub-paragraph (5) “control”—^F1

(a)in the case of control of a company, is to be read in accordance with sections 450 and 451 of CTA 2010;^F1

(b)in the case of control of a partnership, has the meaning given in section 995(3) of ITA 2007;^F1

(c)in 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.^F1

(1)References to a “disposal”, in the case of a debt investment, do not include—^F1

(a)any event that is part of a transaction which extends the period for which the loan relationship or relevant non-lending relationship is to subsist on substantially the same terms,^F1

(b)a release of debt which meets condition A, B, C or E in section 322 of CTA 2009 (release of debts where credits not required to be brought into account),^F1

(c)a modification or replacement of a loan relationship to which section 323A(2) of CTA 2009 (substantial modification) applies (see subsection (1) of that section), or^F1

(d)any event that is part of a transaction falling within sub-paragraph (2).^F1

(2)A transaction falls within this sub-paragraph if—^F1

(a)it is undertaken for commercial purposes, and^F1

(b)immediately before and after the transaction the economic exposure to the debtor’s group is substantially the same.^F1

(3)In sub-paragraph (2), the “debtor’s group” means the debtor of the debt investment and each member of the same consolidated group as the debtor.^F1

(4)Where an event is not a disposal of a debt investment made for the purposes of an investment scheme by virtue of this paragraph—^F1

(a)any assets acquired as part of the transaction of which the event is part are to be treated as a single investment with the debt investment, and^F1

(b)the value invested in that single investment is the value that was invested in the debt investment for the purposes of the investment scheme.^F1

(5)For the purposes of determining the average holding period of an investment scheme, where—^F1

(a)any amount of the money debt under a debt investment made for the purposes of the scheme is repaid by the debtor before it was due to be repaid in accordance with the debt investment’s initial repayment terms, and^F1

(b)it is reasonable to assume that the debtor’s decision to repay that amount of the money debt was not affected by considerations relating to the application of this Part of this Schedule,^F1

that amount of the money debt is to be treated as if it had been repaid in accordance with the debt investment’s initial repayment terms (and the debt investment, or corresponding part of the debt investment, is to be treated as being disposed of accordingly).

(6)But if the application of sub-paragraph (5) would otherwise result in the debt investment, or any part of it, being treated as held for more than 40 months, the debt investment, or that part of it, is to be treated as held for 40 months.^F1

(7)Sub-paragraph (5) does not apply to the repayment of an amount of the money debt under a debt investment made for the purposes of the scheme if, at any time before the repayment, the scheme—^F1

(a)did not have the ability to hold the debt investment, or any part of it, until it was due to be disposed of in accordance with its initial repayment terms, or^F1

(b)had the intention to dispose of the debt investment, or any part of it, before it was due to be disposed of in accordance with its initial repayment terms.^F1

(8)In sub-paragraphs (5) and (7) “initial repayment terms”, in relation to a debt investment, means the terms of the debt investment at the time when the investment was made.^F1

Chapter 4Average holding period: derivatives and hedging^F1

(1)A derivative contract entered into for the purposes of an investment scheme is an investment, subject to the following provisions of this paragraph.^F1

(2)The value invested in the derivative contract is—^F1

(a)where the contract is an option, the cost of acquiring the option (whether from the grantor or another person),^F1

(b)where the contract is a future, the price specified in the contract for the underlying subject matter, or^F1

(c)where the contract is a contract for differences, the notional principal of the contract.^F1

(3)But where entering into a derivative contract constitutes a deemed disposal of an investment or part of an investment by virtue of paragraph 15(2)(a)(ii)—^F1

(a)the derivative contract is not an investment, and^F1

(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 rewards in respect of the investment or part investment.^F1

(4)For the purposes of this Part of this Schedule, 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 paragraph 15(1) or (2))—^F1

(a)the expiry of the contract,^F1

(b)the termination of the contract (whether or not in accordance with its terms),^F1

(c)the disposal, substantial variation, loss or cancellation of the investment scheme's rights under the contract, and^F1

(d)in the case of a derivative contract which is an option, the exercise of the option,^F1

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 derivative contract constitutes (in addition to the disposal of the contract as originally entered into (see sub-paragraph (4)(c)) a new investment consisting of the contract as varied.^F1

(1)This paragraph applies where—^F1

(a)an investment scheme has a hedging relationship between a hedging instrument and a hedged item, and^F1

(b)the hedging relationship relates to exchange gains or losses.^F1

(2)In this paragraph—^F1

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

“hedged item” means—

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

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

(3)An investment scheme has a hedging relationship between a hedging instrument and a hedged item if or to the extent that—^F1

(a)the instrument and the item are designated by the scheme as a hedge, or^F1

(b)in any other case, the instrument is intended to act as a hedge of exposure to—^F1

(i)changes in fair value of the hedged item or an identified portion of the hedged item, or^F1

(ii)variability in cash flows,^F1

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

(4)Where the hedged item is an investment, entering into the hedging relationship is not a deemed disposal of the investment under paragraph 15(2).^F1

(5)The hedging instrument is not an investment for the purposes of the investment scheme to the extent that the conditions in sub-paragraph (3)(a) or (b) are met.^F1

(6)But the termination of the hedging relationship is the making of an investment constituting the hedging instrument if or to the extent that that instrument continues to subsist.^F1

(1)This paragraph applies where an investment scheme has a hedging relationship between—^F1

(a)an interest rate contract, and^F1

(b)a qualifying hedged item held for the purposes of the scheme.^F1

(2)An investment scheme has a hedging relationship between an interest rate contract and a qualifying hedged item if or to the extent that—^F1

(a)the interest rate contract and the qualifying hedged item are designated by the scheme as a hedge, or^F1

(b)in any other case, the interest rate contract is intended to act as a hedge of exposure to—^F1

(i)changes in fair value of the qualifying hedged item or an identified portion of the hedged item, or^F1

(ii)variability in cash flows,^F1

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

(3)Where the qualifying hedged item is an investment, entering into the hedging relationship is not a deemed disposal of the investment under paragraph 15(2).^F1

(4)The interest rate contract is not an investment for the purposes of the investment scheme to the extent that the conditions in sub-paragraph (2)(a) or (b) are met.^F1

(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.^F1

(6)In this paragraph “qualifying hedged item” means—^F1

(a)money placed at interest,^F1

(b)securities (excluding shares issued by companies),^F1

(c)an asset representing an alternative finance arrangement, and^F1

(d)a liability representing a loan relationship.^F1

Chapter 5Average holding period: aggregation of acquisitions and disposals^F1

(1)Where an investment scheme has a controlling interest in a trading company or the holding company of a trading group—^F1

(a)any investment made for the purposes of the scheme in that company after the time when the controlling interest was acquired is to be regarded as having been made at that time, and^F1

(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.^F1

(2)In sub-paragraph (1)(b) “relevant disposal”, in relation to a company, means a disposal which (apart from sub-paragraph (1)) has the effect that the investment scheme ceases to have a 40% interest in the company.^F1

(3)For the purposes of this paragraph, in determining whether an investment scheme has a controlling interest or a 40% interest 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 investment scheme.^F1

(1)Where a venture capital fund has a relevant interest in a trading company or the holding company of a trading group—^F1

(a)any venture capital investment made for the purposes of the fund 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 acquired, and^F1

(b)any disposal for the purposes of the fund of a venture capital investment in the company after that time is to be regarded as not being made until—^F1

(i)a relevant disposal is made, or^F1

(ii)the scheme (or the scheme and one or more investment schemes acting together) ceases to be entitled directly or indirectly to exercise relevant rights in relation to the company.^F1

(2)For the purposes of sub-paragraph (1) a venture capital fund has a relevant interest in a company if —^F1

(a)by virtue of its venture capital investments the fund has at least a 5% interest in the company, or^F1

(b)the total value invested for the purposes of the scheme in venture capital investments that are held for the purposes of the scheme in the company is more than £1 million.^F1

(3)For the purposes of sub-paragraph (1) “relevant disposal” means a disposal immediately following which (ignoring sub-paragraph (1)) the base amount held in investments in the company for the purposes of the venture capital fund is less than 20% of the greatest base amount held in investments in the company for the purposes of the venture capital fund at any one time.^F1

(4)In this Part of this Schedule, “venture capital fund” means an investment scheme in relation to which the condition in sub-paragraph (5) is met.^F1

(5)The condition is that when the scheme starts to invest it is reasonable to assume that over the investing life of the scheme—^F1

(a)at least two-thirds of the total value invested for the purposes of the scheme will be invested in venture capital investments, and^F1

(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.^F1

(6)In determining whether sub-paragraph (5)(b) is met in relation to an investment scheme, apply the rule in sub-paragraph (1) to the scheme.^F1

(7)In this paragraph, “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—^F1

(a)at the time the investment is made the company is unlisted and is likely to remain so,^F1

(b)at least 75% of the total value of the investment is invested in—^F1

(i)newly issued shares, or^F1

(ii)newly issued securities convertible into shares,^F1

(c)the investment is used in a trade carried on by the trading company or the trading group—^F1

(i)to support its growth, or^F1

(ii)for the development of new products or services,^F1

and is not used directly or indirectly to acquire shares in the company 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^F1

(e)the investment scheme (or the scheme and one or more investment schemes acting together) is entitled directly or indirectly to exercise relevant rights in relation to the company.^F1

(8)In this Part of this Schedule, “relevant rights”, in relation to an investment scheme and a company, are rights which—^F1

(a)relate to the conduct of the business and affairs of the company, and^F1

(b)are at least equivalent to the rights which it is reasonable to assume a prudent investor would have obtained on making an investment in the company at arm's length of the same size and nature as that held in the company for the purposes of the investment scheme.^F1

(9)In determining whether the condition in sub-paragraph (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 be regarded as held for the purposes of the venture capital fund.^F1

(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—^F1

(a)any investment made for the purposes of the fund in that company after the time the significant equity stake investment was acquired is to be regarded as having been made at that time, and^F1

(b)any disposal for the purposes of the fund of an investment in the company after that time is to be regarded as not being made until—^F1

(i)a relevant disposal is made, or^F1

(ii)the fund (or the fund and one or more investment schemes acting together) ceases to be entitled directly or indirectly to exercise relevant rights in relation to the company.^F1

(2)In sub-paragraph (1)(b) “relevant disposal” means a disposal which (apart from sub-paragraph (1)) has the effect that the significant equity stake fund ceases to have a 15% interest in the company.^F1

(3)In this Part of this Schedule “significant equity stake fund” means an investment scheme—^F1

(a)which is not a venture capital fund, and^F1

(b)in relation to which the condition in sub-paragraph (4) is met.^F1

(4)The condition is that when the scheme starts to invest it is reasonable to assume that over the investing life of the scheme—^F1

(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^F1

(b)more than 50% of the total value will be invested in investments which are held for 40 months or more.^F1

(5)In determining whether sub-paragraph (4)(b) is met in relation to an investment scheme, apply the rule in sub-paragraph (1) to the scheme.^F1

(6)In this paragraph, “significant equity stake investment”, in relation to an investment scheme, means an investment in a trading company or the holding company of a trading group where—^F1

(a)at the time the investment is made, the company is unlisted and likely to remain so,^F1

(b)by virtue of the investment (on its own or with other investments) the scheme has a 20% interest in the company, and^F1

(c)the investment scheme (or the scheme and one or more investment schemes acting together) is entitled directly or indirectly to exercise relevant rights in relation to the company.^F1

(7)For the purposes of this Part of this Schedule, 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 for the purposes of the significant equity stake fund.^F1

(1)Where a controlling equity stake fund has a 25% interest in a trading company or the holding company of a trading group—^F1

(a)any investment made for the purposes of the controlling equity stake fund in the company after the time the 25% interest was acquired is to be regarded as having been made at that time, and^F1

(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.^F1

(2)In sub-paragraph (1)(b), “relevant disposal”, in relation to a company, means a disposal which (apart from sub-paragraph (1)) has the effect that the controlling equity stake fund ceases to have a 25% interest in the company.^F1

(3)In this Part of this Schedule, “controlling equity stake fund” means an investment scheme—^F1

(a)which is not a venture capital fund or significant equity stake fund, and^F1

(b)in relation to which the condition in sub-paragraph (4) is met.^F1

(4)The condition is that when the scheme starts to invest it is reasonable to assume that, over the investing life of the scheme—^F1

(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^F1

(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.^F1

(5)In determining whether sub-paragraph (4)(b) is met in relation to an investment scheme, apply the rule in sub-paragraph (1) to the scheme.^F1

(6)For the purposes of this paragraph, in determining whether a controlling equity stake fund has a controlling interest or 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 for the purposes of the controlling equity stake fund.^F1

(1)Where a real estate fund has a major interest in any land—^F1

(a)any 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^F1

(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 a relevant disposal is made.^F1

(2)In sub-paragraph (1)(b) “relevant disposal” means a disposal immediately following which (ignoring sub-paragraph (1)) the base amount held in investments in the land for the purposes of the real estate fund is less than 50% of the greatest base amount held in investments in the land for the purposes of the real estate fund at any one time.^F1

(3)Where a real estate fund has a major interest in any land (“the original land”) and subsequently acquires a major interest in any adjacent land—^F1

(a)the acquisition is an investment in the original land for the purposes of sub-paragraph (1)(a), and^F1

(b)after the acquisition, the adjacent land is to be regarded as part of the original land for the purposes of sub-paragraphs (1) and (2).^F1

(4)In this Part of this Schedule, “real estate fund” means an investment scheme—^F1

(a)which is not a venture capital fund, significant equity stake fund or controlling equity stake fund, and^F1

(b)in relation to which the condition in sub-paragraph (5) is met.^F1

(5)The condition is that when the scheme starts to invest it is reasonable to assume that over the investing life of the scheme—^F1

(a)more than 50% of the total value invested for the purposes of the scheme will be invested in land, and^F1

(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.^F1

(6)In determining whether sub-paragraph (5)(b) is met in relation to an investment scheme, apply the rule in sub-paragraph (1) to the scheme.^F1

(1)Where a credit fund has a significant debt investment—^F1

(a)any debt investment or investment in shares made for the purposes of the fund after the time the significant debt investment was made that is associated with the significant debt investment is to be regarded as having been made at that time, and^F1

(b)any disposal for the purposes of the fund of the significant debt investment or any debt investment or investment in shares associated with the significant debt investment (all together, “associated investments”) after that time is to be regarded as not being made until a relevant disposal is made.^F1

(2)In sub-paragraph (1)(b) “relevant disposal” means a disposal immediately following which (ignoring sub-paragraph (1)) the base amount held in associated investments for the purposes of the credit fund is less than 50% of the greatest base amount held in associated investments for the purposes of the credit fund at any one time.^F1

(3)In this Part of this Schedule, “credit fund” means an investment scheme—^F1

(a)which is not a venture capital fund, significant equity stake fund, controlling equity stake fund, or real estate fund, and^F1

(b)in relation to which the condition in sub-paragraph (4) is met.^F1

(4)The condition is that when the scheme starts to invest it is reasonable to assume that over the investing life of the scheme—^F1

(a)more than 50% of the total value invested for the purposes of the scheme will be invested in debt investments, and^F1

(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.^F1

(5)In determining whether sub-paragraph (4)(b) is met in relation to an investment scheme, apply the rule in sub-paragraph (1) to the scheme.^F1

(6)For the purposes of this paragraph—^F1

(a)“debt investment” includes an investment in—^F1

(i)any arrangement which produces a return which is economically equivalent to interest within the meaning of Chapter 2A of Part 6 of CTA 2009 (see section 486B(2) of that Act), or^F1

(ii)an asset representing an alternative finance arrangement, a creditor repo, a creditor-quasi repo or a manufactured interest relationship;^F1

(b)a “significant debt investment”, in relation to a credit fund, means a debt investment of at least £1 million or at least 5% of the total amounts raised or to be raised from external investors in the fund;^F1

(c)“shares” includes—^F1

(i)stock;^F1

(ii)any other interest of a member in a company (including a company that has no share capital);^F1

(iii)any interest as co-owner of shares (whether the shares are owned jointly or in common and whether or not the interests of the co-owners are equal);^F1

(iv)rights of unit holders in unit trust schemes that are treated as if they were shares for the purposes of TCGA 1992 as a result of section 99(1) of that Act;^F1

(v)units in tax transparent funds that are treated as assets for the purposes of that Act as a result of section 103D(3) of that Act;^F1

(vi)any derivative contract to the extent that the underlying subject matter of the contract is shares;^F1

(vii)any contract which is not a derivative contract within the meaning of Part 7 of CTA 2009 only as a result of section 589(2)(b) of that Act (general exclusion of contracts whose underlying subject matter consists of shares);^F1

(d)a debt investment is “associated” with a significant debt investment if the debtor of the debt investment is—^F1

(i)also the debtor of the significant debt investment, or^F1

(ii)a member of the same consolidated group as the debtor of the significant debt investment;^F1

(e)an investment in shares is “associated” with a significant debt investment if the shares are in—^F1

(i)the debtor of the significant debt investment, or^F1

(ii)a member of the same consolidated group as the debtor of the significant debt investment.^F1

(1)Paragraph 13(5) (disregard of intermediate holdings and holding structures) does not apply to an investment made for the purposes of a fund of funds in an investment scheme (and, accordingly, such an investment is regarded as an investment in the investment scheme itself).^F1

(2)Sub-paragraph (1) does not apply in relation to a fund of funds in relation to an investment scheme if it is reasonable to assume that the main purpose or one of the main purposes of the making of any investment in any investment scheme for the purposes of the fund of funds is to increase the proportion of carried interest arising to any person which is qualifying carried interest.^F1

(3)Where by virtue of sub-paragraph (1) a fund of funds has a significant investment in an investment scheme (“the underlying scheme”)—^F1

(a)any qualifying investment made for the purposes of the fund in the underlying scheme after the time the significant investment was made is to be regarded as having been made at that time, and^F1

(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.^F1

(4)In sub-paragraph (3)(b) “relevant disposal”, in relation to an underlying scheme, means a disposal which (apart from sub-paragraph (3)) has the effect that the fund of fund's investment in the underlying scheme is worth less than whichever is the greater of—^F1

(a)£1 million, or^F1

(b)5% of the total value invested for the purposes of the fund of funds in investments in the underlying scheme made before the disposal.^F1

(5)In this Part of this Schedule, “fund of funds” means an investment scheme in relation to which the condition in sub-paragraph (6) is met.^F1

(6)The condition is that when the scheme starts to invest it is reasonable to assume that over the investing life of the scheme—^F1

(a)at least 80% of the total value invested for the purposes of the scheme will be invested in—^F1

(i)investment schemes that are independent from the scheme;^F1

(ii)portfolios of investments acquired from investment schemes that are independent from the scheme;^F1

(iii)direct co-investments;^F1

(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.^F1

(7)In determining whether sub-paragraph (6)(b) is met in relation to an investment scheme, apply the rule in sub-paragraph (3) to the scheme.^F1

(8)In this paragraph—^F1

(a)“direct co-investment”: an investment made for the purposes of an investment scheme (the “investing scheme”) is a “direct co-investment” if it is made alongside and on substantially the same terms as an investment made by another investment scheme—^F1

(i)in which an investment has been made for the purposes of the investing scheme, and^F1

(ii)which is independent from the investing scheme;^F1

(b)“independent”: an investment scheme is independent from another investment scheme if the persons providing investment management services to the first scheme and the persons providing investment management services to the second scheme are not the same or substantially the same;^F1

(c)“significant investment”, in relation to an investment scheme means—^F1

(i)an investment of a least £1 million in the scheme, or^F1

(ii)an investment of at least 5% of the total amounts raised or to be raised from external investors in the scheme;^F1

(d)“qualifying investment” means an investment made for the purposes of a fund of funds in an investment scheme (“the underlying scheme”) where it is reasonable to assume that—^F1

(i)the investment is held on substantially the same terms as other investments made by external investors in the underlying scheme,^F1

(ii)the underlying scheme has not made an investment in the fund of funds,^F1

(iii)the underlying scheme is independent from the fund of funds, and^F1

(iv)the investment in the underlying scheme 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 that is not independent from the underlying scheme.^F1

(9)For the purposes of this paragraph—^F1

(a)when an investment in an investment scheme is made by subscribing for an interest in the scheme—^F1

(i)the investment is to be treated as having been made where there was an a unconditional obligation to subscribe for the interest, and^F1

(ii)paragraph 19(4) applies for the purposes of determining when such an obligation is not to be regarded as unconditional as if the reference in paragraph 19(4)(b) to the debt investment were a reference to the investment in the investment scheme;^F1

(b)an investment made for the purposes of a fund of funds in an investment scheme includes an investment in an entity that, when the fund makes the investment, it is reasonable to assume is an investment scheme;^F1

(c)an investment or part of an investment in an investment scheme is disposed of where the investment or part of the investment would be disposed by virtue of paragraph 15 if the investment were an asset for the purposes of TCGA 1992;^F1

(d)any distribution made by the underlying scheme to the fund of funds is to be treated as a part disposal of the investment in the scheme.^F1

Chapter 6Conditionally qualifying carried interest^F1

(1)Carried interest which—^F1

(a)arises to an individual from an investment scheme,^F1

(b)is not 100% qualifying carried interest, and^F1

(c)is conditionally qualifying carried interest,^F1

is to be treated as if it were 100% qualifying carried interest.

(2)Carried interest is conditionally qualifying carried interest if Conditions A to C are met.^F1

(3)Condition A is that the carried interest arises to the individual in the period of ten years beginning with the day on which the scheme starts to invest.^F1

(4)Condition B is that it is reasonable to assume that, were the carried interest to arise to the individual at the relevant time (but by reference to the same investments), it would be 100% qualifying carried interest.^F1

(5)The “relevant time” is whichever is the earliest of—^F1

(a)the time when it is reasonable to assume that the investment scheme will be wound up;^F1

(b)the end of the period of four years beginning with the time when it is reasonable to assume that the scheme will cease to invest;^F1

(c)the end of the period of—^F1

(i)four years beginning with the day on which the sum of carried interest arises to the individual, or^F1

(ii)ten years beginning with that day if the carried interest was calculated on the realisation model;^F1

(d)the 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.^F1

(6)Sub-paragraph (4) does not affect what would otherwise be the time at which an investment is disposed of for the purposes of this Part of this Schedule.^F1

(7)Condition C is that the individual makes a claim under this paragraph for this paragraph to apply to the carried interest.^F1

(1)Carried interest which is conditionally qualifying carried interest ceases to be conditionally qualifying carried interest at whichever is the earliest of—^F1

(a)the time when the investment scheme is wound up;^F1

(b)the end of the period of four years beginning with the time the scheme ceases to invest;^F1

(c)the end of the period of—^F1

(i)four years beginning with the day on which the sum of carried interest arises to the individual, or^F1

(ii)ten years beginning with that day if the carried interest was calculated on the realisation model;^F1

(d)the 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;^F1

(e)the time at which Condition B in paragraph 31(4) ceases to be met.^F1

(2)Carried interest which ceases to be conditionally qualifying carried interest is to be treated as arising to the individual at the time when the carried interest ceases to be conditionally qualifying carried interest (but in relation to the same investments) to the extent that, had it in fact arisen to the individual at that time (but in relation to the same relevant investments), it would not have been qualifying carried interest.^F1

(3)Carried interest which is conditionally exempt from income tax by virtue of section 809FZS of ITA 2007 when this paragraph comes into force is to be treated as if it were conditionally qualifying carried interest for the purposes of this paragraph.^F1

(4)Any amount paid by way of income tax or capital gains tax in respect of carried interest to which paragraph 31 applies is to be treated as if it had been paid in respect of any income tax liability arising under sub-paragraph (2).^F1

Chapter 7Supplementary^F1

(1)For the purposes mentioned in sub-paragraph (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 increase the proportion of carried interest which is qualifying carried interest.^F1

(2)The purposes referred to in sub-paragraph (1) are—^F1

(a)determining the average holding period, or^F1

(b)determining whether an investment scheme is a venture capital fund, significant equity stake fund, controlling equity stake fund, real estate fund, credit fund or fund of funds.^F1

(1)The Treasury may by regulations make provision relating to the calculation of the average holding period in some or all cases.^F1

(2)The provision referred to in sub-paragraph (1) includes in particular—^F1

(a)provision for a method of calculating that period which is different from that in paragraph 13;^F1

(b)provision as to what is and is not to be regarded as an investment;^F1

(c)provision as to when an investment is to be regarded as made or disposed of;^F1

(d)anti-avoidance provision.^F1

(3)Regulations under this paragraph may—^F1

(a)amend this Part of this Schedule;^F1

(b)make different provision for different purposes;^F1

(c)contain incidental, supplemental, consequential and transitional provision and savings.^F1

Chapter 8Interpretation^F1

(1)In this Part of this Schedule—^F1

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

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

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

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

the investment schemes act together to secure greater control 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), disregarding section 508 of that Act;

“associated”: two or more investment schemes are “associated” if, under arrangements including those investment schemes, an investor in one of those schemes would reasonably regard that investment as an investment in the arrangements as a whole rather than exclusively in any particular scheme;

“consolidated group” means a group within the meaning given by international accounting standards;

“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 paragraph 27;

“controlling interest” has the meaning given in sub-paragraph (3);

“credit fund” has the meaning given in paragraph 29;

“creditor repo” and “creditor quasi-repo” have the same meaning as in Part 6 of CTA 2009 (see sections 543 and 544 of that Act) (but see sub-paragraph (7));

“debt investment” has the meaning given in paragraph 19 (but see also paragraph 29(6)(a) which expands the definition for the purposes of that paragraph);

“debtor” —

in relation to a debt investment within the meaning of paragraph 19, means the person standing in the position of debtor as respects the debt;

in relation to a debt investment falling within paragraph 29(6)(a)(i), means the party from whom the return is due;

in relation to alternative finance arrangements means any person by whom sums are payable under the arrangements for the purposes of the investment scheme;

in relation to an asset representing a creditor repo or creditor quasi-repo means the person described in section 543(2) or 544(2) of CTA 2009;

in relation to an asset representing a manufactured interest relationship means the person by whom the manufactured interest within the meaning of Chapter 9 of Part 6 of CTA 2009 (see section 539(5) of that Act) is payable;

“derivative contract” has the same meaning as in Part 7 of CTA 2009 (but see sub-paragraph (6));

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

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

“fund of funds” has the meaning given in paragraph 30;

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

“interest rate contract” means—

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

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 sub-paragraph (2);

“investment” does not include—

cash awaiting investment, or

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

“loan relationship” has the meaning given by section 302(1) of CTA 2009 (but see sub-paragraph (7));

“major interest in land”—

in relation to land in England and Wales, Scotland or Northern Ireland has the same meaning as in section 1178A of CTA 2009, but as if the reference in subsection (4) of that section to “7 years” were to “21 years”;

in relation to land in a territory outside the United Kingdom, means any equivalent interest under the law of that territory;

“manufactured interest relationship” has the same meaning as in the Corporation Tax Acts (see section 539 of the CTA 2009) (but see sub-paragraph (7));

“money debt” means a debt which is a money debt for the purposes of Part 5 of CTA 2009 (see section 303(1) of that Act) or Chapter 2 of Part 6 of that Act (see section 478(3) of that Act);

“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 paragraph 28;

“realisation model”: a sum of carried interest is calculated on the “realisation model” if—

it falls within paragraph 2(2) or (3) (disregarding paragraph 2(2)(b) and (3)(b)), or

in the case of consideration or a tax distribution treated as a sum of carried interest as a result of paragraph 3 or 4, if the carried interest to which the consideration or tax distribution relates were to arise, it would fall within paragraph 2(2) or (3) (disregarding paragraph 2(2)(b) and (3)(b));

“relevant non-lending relationship” has the same meaning as in Chapter 2 of Part 6 of CTA 2009 (see section 478(2) of that Act) (but see sub-paragraph (7));

“relevant rights” has the meaning given by paragraph 25;

“significant equity stake fund” has the meaning given by paragraph 26;

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

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

“unlisted”: a company is unlisted if—

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

there 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 paragraph 25.

(2)In this Part of this Schedule—^F1

(a)references to when a scheme starts or ceases to invest are to the time when investments start or cease to be made for the purposes of the scheme, and^F1

(b)references to the investing life of the scheme are to the time between when a scheme starts and ceases to invest.^F1

(3)For the purposes of this Part of this Schedule, an investment scheme has a controlling interest in a company if share capital of the company is held for the purposes of the scheme which—^F1

(a)amounts to more than 50% of the ordinary share capital of the company, and^F1

(b)carries an entitlement to more than 50% of—^F1

(i)voting rights in the company,^F1

(ii)profits available for distribution to shareholders, and^F1

(iii)assets of the company available for distribution to shareholders in a winding-up.^F1

(4)For the purposes of this Part of this Schedule, an investment scheme has an interest of 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—^F1

(a)amounts to at least that percentage of the ordinary share capital of the company, and^F1

(b)carries an entitlement to at least that percentage of—^F1

(i)voting rights in the company,^F1

(ii)profits available for distribution to shareholders, and^F1

(iii)assets of the company available for distribution to shareholders in a winding-up.^F1

(5)For the purposes of sub-paragraphs (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.^F1

(6)For the purposes of the definition of “derivative contract”, read Part 7 of CTA 2009 as if—^F1

(a)references to a company were references to an investment scheme, and^F1

(b)references to a contract of a company were references to a contract for the purposes of an investment scheme.^F1

(7)For the purposes of the definition of “creditor repo”, “creditor quasi-repo”, “loan relationship”, “manufactured interest relationship” and “relevant non-lending relationship” read the relevant provisions of Part 5 and 6 of CTA 2009 as if—^F1

(a)references to a company were references to an investment scheme, and^F1

(b)the reference to a company having such a relationship were a reference to there being such a relationship for the purposes of an investment scheme.^F1

Part 4Carried interest elections^F1

(1)An individual (“A”) who performs investment management services under arrangements mentioned in section 23I(1)(a) may make an election under this paragraph in respect of an investment scheme if—^F1

(a)a sum of carried interest arises to A from the scheme under the arrangements for the purposes of section 23I(1)(b), or^F1

(b)it is reasonable to expect that such a sum will arise to A.^F1

(2)Sub-paragraph (3) applies for a tax year (“the relevant tax year”) where an election made under this Part of this Schedule has effect for that tax year in respect of an investment scheme (in this Part of this Schedule, “the relevant scheme”).^F1

(3)The amount determined in accordance with sub-paragraph (4) is to be treated for the purposes of section 23I as a sum of carried interest arising to A from the relevant scheme under the arrangements on the last day of the relevant tax year.^F1

(4)The amount determined in accordance with this sub-paragraph is the amount given by reducing—^F1

(a)the amount of carried interest that would arise to A from the relevant scheme under the arrangements for the purposes of section 23I(1)(b) in the relevant tax year in the circumstances mentioned in sub-paragraph (5), by^F1

(b)the sum of the amounts treated under this paragraph as sums of carried interest arising to A from the relevant scheme under the arrangements in previous tax years.^F1

(5)Those circumstances are that—^F1

(a)all of the investments held by the relevant scheme in the relevant tax year, and previously held by the scheme, whose disposal would be relevant to A’s entitlement to carried interest, were disposed of in the relevant tax year,^F1

(b)the amount realised on the disposal of each investment that was not actually disposed of in, or before, the relevant tax year were the amount of the costs to the relevant scheme in acquiring that investment,^F1

(c)all income that was received by the scheme (whether before or during the relevant tax year) and that would be relevant to A’s entitlement to carried interest, were received in the relevant tax year, and^F1

(d)all profits realised by the scheme as a result of those disposals and the receipt of that income were distributed to its investors in the relevant tax year.^F1

(6)Where—^F1

(a)distributions were made by the scheme to external investors before the relevant tax year, and^F1

(b)the timing of those distributions affects the amount of carried interest that actually arises to A,^F1

the amount of carried interest to be presumed to arise in the circumstances mentioned in sub-paragraph (5) is to reflect the fact those distributions were made before the relevant tax year.

(7)But if reflecting that fact would lead to a presumption that an amount of carried interest had arisen before the relevant tax year, any such amount is to be presumed to arise in the relevant tax year.^F1

(8)An election under this paragraph—^F1

(a)must be made by notice given to an officer of Revenue and Customs, and^F1

(b)may not be revoked.^F1

(9)A notice making an election—^F1

(a)must state the first tax year for which it is to have effect, and^F1

(b)may not be given after 31 January following the end of that tax year.^F1

(10)For the purposes of this Part of this Schedule where an election has been made under section 103KFA of TCGA 1992 in respect of a scheme (election for carried interest gains to be chargeable as scheme profits arise)—^F1

(a)the election is to be treated as if it were an election made under this paragraph, and^F1

(b)references to an amount treated as a sum of carried interest arising to an individual from a scheme under sub-paragraph (3) (howsoever expressed) include chargeable gains treated as accruing to the individual under section 103KFA(3) of TCGA 1992 (election for carried interest gains to be chargeable as scheme profits arise) in respect of the scheme.^F1

(1)Where an election has been made under paragraph 36 in relation to an investment scheme (“S”) that is associated with another investment scheme, the election has effect in respect of the other scheme for any tax year for which it has effect in relation to S (whether or not the conditions for an election to be made in respect of the other scheme were met at that time).^F1

(2)“Associated”, in relation to two or more investments schemes, has the same meaning as in Part 3 of this Schedule.^F1

(1)The treatment of an amount under paragraph 36(3) as a sum of carried interest arising to an individual does not prevent the individual being charged to income tax or national insurance contributions as a result of section 23I in relation to carried interest that arises to the individual from the relevant scheme.^F1

(2)But sub-paragraph (3) applies where—^F1

(a)the individual has made an election under paragraph 36,^F1

(b)an amount is to be treated as a sum of carried interest arising to the individual for the purposes of section 23I from the relevant scheme under paragraph 36(3),^F1

(c)the individual has paid (and has not been repaid)—^F1

(i)an amount of income tax or national insurance contributions to which the individual was chargeable as a result of the amount being so treated, or^F1

(ii)where paragraph 36(10)(b) applies, an amount of capital gains tax that is attributable to a chargeable gain treated as accruing to the individual,^F1

(d)the individual is charged to income tax and national insurance contributions by virtue of section 23I in relation to carried interest that—^F1

(i)arises to the individual from the relevant scheme under the arrangements mentioned in section 23I(1)(a), and^F1

(ii)arises in or after the tax year for which an amount was first treated as a sum of carried interest arising to the individual from the scheme under paragraph 36(3).^F1

(3)The individual may make a claim for one or more consequential adjustments to be made in respect of the profits chargeable by virtue of section 23I in relation to carried interest mentioned in sub-paragraph (2)(d) to take account of the amounts paid as mentioned in sub-paragraph (2)(c).^F1

(4)On a claim under sub-paragraph (3) an officer of Revenue and Customs must make such of the consequential adjustments claimed (if any) as are just and reasonable.^F1

(5)Consequential adjustments in respect of the profits chargeable by virtue of section 23I must not have the effect that—^F1

(a)the total of—^F1

(i)the amount of income tax and national insurance contributions charged on the adjusted profits by virtue of section 23I, and^F1

(ii)any amounts paid as mentioned in sub-paragraph (2)(c), is less than^F1

(b)the amount of income tax and national insurance contributions to which the individual was chargeable by virtue of section 23I in respect of the sum of carried interest mentioned in sub-paragraph (2)(d) before the making of any consequential adjustments.^F1

(6)Consequential adjustments may be made—^F1

(a)in respect of any period, and^F1

(b)by way of an assessment, the modification of an assessment, the amendment of a claim, or otherwise.^F1

(7)No claim may be made under section 23Q (carried interest: avoidance of double taxation) in respect of tax charged as a result of an amount being treated as a sum of carried interest under paragraph 36(3).^F1

(1)Sub-paragraph (3) applies where—^F1

(a)an individual has made an election under paragraph 36,^F1

(b)an amount is treated under paragraph 36(3) as a sum of carried interest arising to the individual from the relevant scheme under the arrangements mentioned in section 23I(1)(a), and^F1

(c)the conditions in sub-paragraph (2) are met.^F1

(2)Those conditions are that—^F1

(a)all, or substantially all, of the investments of the relevant scheme have been disposed of,^F1

(b)the amount of carried interest that has actually arisen to the individual from the relevant scheme under the arrangements since the beginning of the first tax year in which an amount was treated under paragraph 36(3) as a sum of carried interest arising to the individual is less than the sum of the amounts treated as carried interest under that paragraph, and^F1

(c)no further amount of carried interest can reasonably be expected to arise to the individual from the relevant scheme under those arrangements.^F1

(3)The amount determined in accordance with sub-paragraph (4) is to be treated for income tax purposes as a loss of the trade treated as carried on by the individual under section 23I for the tax year in which the conditions in sub-paragraph (2) are first met.^F1

(4)The amount of that loss is the amount given by subtracting—^F1

(a)the amount treated as the profits of a trade carried on by the individual under section 23I by virtue of the carried interest that actually arose to the individual from the relevant scheme under the arrangements since the beginning of the first tax year in which an amount was treated as a sum of carried interest arising to the individual under paragraph 36(3), from^F1

(b)the amount treated as the profits of a trade carried on by the individual under section 23I by virtue of the amounts being treated under paragraph 36(3) as sums of carried interest arising to the individual from the relevant scheme.^F1

(5)Where an amount is treated as a loss of the trade for a tax year as a result of sub-paragraph (3)—^F1

(a)paragraph 36(3) does not apply (in relation to the individual and the relevant scheme) for any tax year after that tax year, and^F1

(b)if carried interest arises to the individual in respect of the relevant scheme after that tax year, the individual may not make a claim under paragraph 38(3) in respect of tax charged in relation to it.^F1

(1)This paragraph applies where an election was made by an individual under paragraph 36 and the main purpose, or one of the main purposes, of making the election is to cause an amount to be treated as a loss of the trade under paragraph 39(3).^F1

(2)Any such amount that would (in the absence of this paragraph) be treated as a loss of the trade under that paragraph is to be counteracted by the making of such adjustments as are just and reasonable.^F1

(3)Any adjustments required to be made under this paragraph (whether or not by an officer of Revenue and Customs) may be made by way of—^F1

(a)an assessment,^F1

(b)the modification of an assessment, or^F1

(c)amendment or disallowance of a claim, or otherwise.^F1