How is carried interest from a direct lending fund taxed under section 809FZQ of the Income Tax Act 2007?

Under section 809FZQ, all carried interest arising from a direct lending fund is classified as income-based carried interest in its entirety. This means it is chargeable to income tax at the applicable rates rather than the potentially lower capital gains tax rates, ensuring fund managers pay income tax on lending fund profits.

What qualifies as a direct lending fund under United Kingdom tax law?

A direct lending fund is an investment scheme that is not a venture capital fund, significant equity stake fund, controlling equity stake fund or real estate fund. It must be reasonable to suppose that, by the time the scheme ceases making investments, the majority of investments by value will have been direct loans.

What is a direct loan for the purposes of section 809FZQ?

A direct loan arises when an investment scheme advances money at interest or for a return determined by reference to the time value of money. This captures straightforward interest-bearing loans and any lending arrangement where the return is essentially a time-based financial return on the money advanced.

Can acquiring an existing loan count as making a direct loan under section 809FZQ?

Yes, acquiring an existing loan can count as making a direct loan, but only if the acquisition takes place within 120 days of the date the money was first advanced under that loan. This prevents funds from arguing that purchasing recently originated loans is fundamentally different from originating them directly.

Income Tax Act 2007 section 809FZQ

Direct lending funds

Section 809FZQ provides that carried interest arising from a direct lending fund is treated as income-based carried interest in its entirety, and defines what constitutes a direct lending fund and a direct loan.

All carried interest from a direct lending fund is classified as income-based carried interest, meaning it is chargeable to income tax rather than capital gains tax
A direct lending fund is an investment scheme that is not a venture capital fund, significant equity stake fund, controlling equity stake fund or real estate fund, and where the majority of investments by value are expected to be direct loans
A direct loan is one where money is advanced at interest or for a return determined by reference to the time value of money
Acquiring an existing direct loan counts as making a direct loan, provided the acquisition takes place within 120 days of the money originally being advanced

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