What is the purpose of section 103KFE of the Taxation of Chargeable Gains Act 1992?

Section 103KFE is an anti-avoidance provision that prevents individuals from exploiting the carried interest election rules under section 103KFA to manufacture artificial allowable losses. Where a main purpose of making the election is to generate a deemed loss under section 103KFD(3), the provision requires that loss to be counteracted by just and reasonable adjustments.

What is the purpose test under section 103KFE?

The purpose test examines whether the main purpose, or one of the main purposes, of making the carried interest election under section 103KFA was to cause a deemed loss to accrue under section 103KFD(3). If this purpose test is satisfied, the anti-avoidance rule is triggered and any resulting loss is counteracted through just and reasonable adjustments.

How does HMRC counteract losses under section 103KFE?

HMRC may counteract artificial losses through several methods including issuing a new tax assessment, modifying an existing assessment, or amending or disallowing a claim. The legislation also permits adjustments by parties other than HMRC, such as an individual amending their own tax return, giving broad flexibility to address avoidance arrangements.

Can an individual use a carried interest election to offset artificial losses against other chargeable gains?

No. If HMRC determines that a main purpose of the election under section 103KFA was to manufacture a deemed loss under section 103KFD(3) — for example, to offset it against other chargeable gains — section 103KFE applies. The loss is counteracted by just and reasonable adjustments, effectively removing any tax benefit from the artificially engineered loss.

Taxation of Chargeable Gains Act 1992 section 103KFE

Anti-avoidance

Section 103KFE prevents individuals from exploiting the carried interest election rules to manufacture artificial allowable losses for tax purposes.

Where an individual has elected under section 103KFA for carried interest gains to be charged as scheme profits arise, and a main purpose of making that election is to generate a deemed loss under section 103KFD(3), the anti-avoidance rule applies.
Any loss that would otherwise accrue to the individual under section 103KFD(3) is to be counteracted by making such adjustments as are just and reasonable.
The test focuses on the purpose behind making the election — specifically whether generating the loss was the main purpose, or one of the main purposes, of the election.
Adjustments may be made by way of a new assessment, modification of an existing assessment, or amendment or disallowance of a claim, and may be carried out by HMRC or otherwise.

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