What is the 20% rule under section 819 of the Income Tax Act 2007?

The 20% rule requires that a UK-based investment manager and any connected persons intend their combined beneficial entitlement to a non-UK resident client's relevant disregarded income will not exceed 20% during any qualifying period. At least 80% of that income must consist of amounts to which they are not beneficially entitled.

What happens if the 80% threshold is not achieved under section 819?

If the 80% threshold is not fully achieved, the 20% rule can still be satisfied under Condition B. This applies only where the shortfall is attributable to matters genuinely outside the control of the investment manager and connected persons, and they have taken reasonable steps to mitigate the effect of those external factors.

What are Condition A and Condition B in section 819 ITA 2007?

Condition A requires that the investment manager and connected persons intended at least 80% of the non-UK resident's relevant disregarded income to be free from their beneficial entitlement. Condition B is a safety net allowing the rule to be met despite a shortfall, provided it resulted from uncontrollable external factors and reasonable mitigation steps were taken.

Where are the key terms used in section 819 defined?

Key terms used in section 819 are defined in subsequent sections of the Income Tax Act 2007. Qualifying period is defined in section 820, relevant disregarded income in section 821, and beneficial entitlement in section 822. These definitions are essential for correctly applying the 20% rule to UK-based investment managers.

Income Tax Act 2007 section 819

Investment managers: the 20% rule

Section 819 sets out the "20% rule" that limits the extent to which a UK-based investment manager and connected persons may have a beneficial interest in the relevant disregarded income of a non-UK resident client.

The investment manager and any connected persons must intend that their combined beneficial entitlement to the non-UK resident's relevant disregarded income will not exceed 20% of that income during any qualifying period.
At least 80% of the non-UK resident's relevant disregarded income must therefore consist of amounts to which neither the investment manager nor any connected person is beneficially entitled.
If the 80% threshold is not achieved, the rule is still satisfied provided the shortfall is attributable to matters outside the control of the investment manager and connected persons.
Even where external factors cause the shortfall, the rule will only be met if the investment manager and connected persons have taken reasonable steps to mitigate the effect of those factors.

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