Income Tax Act 2007 section 809EZC

Meaning of "carried interest" in section 809EZB

Section 809EZC defines what counts as "carried interest" for the purposes of the disguised investment management fees rules, and explains when profit-related returns lose their carried interest status because there was no real risk of them not arising.

• Carried interest is a sum arising to an individual by way of profit-related return — meaning it depends on actual investment profits, varies substantially with those profits, and is measured by reference to the same profits used to determine returns to external investors
• Where there was no significant risk that at least a certain minimum amount would not arise to the individual, that minimum amount is stripped out and is not treated as carried interest (and is therefore potentially within the disguised fee charge)
• The risk assessment is carried out both on each individual sum and on all sums collectively for the tax year, measured at the latest of the date the individual joined the arrangements, began performing investment management services, or the date of any material change to the terms affecting their returns
• Where multiple profit-related returns arise in a tax year, the minimum amount is apportioned between them — first by attributing identifiable portions to specific sums, then by dividing the remainder on a just and reasonable basis