UK: Finance Act 2016, Autumn Statement 2016 And Finance Bill 2017

Last Updated: 5 January 2017
Article by Ann E Casey, Richard Carson, Peter Jackson and Rob Young

The UK's Finance Bill received Royal Assent on 15 September 2016, becoming the Finance Act 2016.

The UK Chancellor, Philip Hammond, delivered his Autumn Statement on 23 November 2016. Our overview of the key tax announcements is available here.

The draft legislation for the UK's Finance Bill 2017 was published for consultation on 5 December 2016. We are currently reviewing the draft legislation.

Our recommendation

If you would like more information on how any of the changes or proposals affect you or your business or how they may apply in specific circumstances, please contact a member of the team.

Brexit and the UK tax landscape

We published an article on the impact of the UK's decision to leave the European Union shortly after the results of the referendum were announced. The article is available here. Little more is known now than was at the time of the referendum about the implications of Brexit for the UK's tax code. It is likely to be some time before we have greater clarity on the impact of Brexit on the UK's tax code.

Our recommendation

If you are concerned about the possible implications of Brexit for you or your business, please contact a member of the team.

Disguised investment management fees ("DIMF") and carried interest

A succession of new measures have been introduced in 2015 and 2016 aimed at countering structures intended to deliver capital gains tax treatment for disguised fee income where such fees relate to the provision of UK based investment management services to investment schemes. The new regime treats as disguised fees any economic return to an investment manager other than repayment of an investment, a conventional return on that investment or carried interest (which satisfies certain risk hallmarks). Disguised fees are within the charge to UK income tax as income of a trade deemed to be carried on by the investment manager. Where a payment falls to be treated as genuine carried interest (and not DIMF), provisions ensure that such carried interest is subject to UK capital gains tax or UK income tax (depending on the underlying fund receipts out of which the carried interest is paid), notwithstanding that the carried interest may arise to a non-UK resident person or that the investment manager is non-UK domiciled and the carried interest is not remitted to the UK. This is achieved by treating all carried interest as not being a "foreign" gain to which the remittance basis of UK capital gains taxation would or might apply for a non-UK domiciled investment manager if and to the extent that the relevant management services to which the carried interest relates are undertaken in the UK.

The UK Government's approach to these changes has been incremental in so far as successive changes have been introduced commencing with the Finance Act 2015 so as to broaden the scope of the anti-avoidance rules and the circumstances under which DIMF or carried interest is treated as "arising" to a UK based investment manager so as to trigger the relevant charge to UK income tax or UK capital gains tax. The Finance Act 2016 has continued this approach by requiring regard to be had to the investment period for underlying assets of an investment scheme and imposing "income based carried interest" treatment (i.e. a charge to UK income tax) where the average holding period of a fund's underlying investments is less than 36 months (in which case, 100% of the carried interest is treated as subject to income tax). A phased introduction of capital gains tax treatment for carried interest then operates where the average holding period for underlying fund investments is more than 36 months but less than 40 months. Where the average investment holding period for fund investments is 40 months or longer then capital gains tax treatment will or may then be appropriate for the carried interest gains.

It should be noted that the new regime for DIMF and carried interest does not affect the UK tax position of third party investors in a fund who will be taxable or not (as the case may be) in respect of their investment in the investment scheme without regard to these new rules, which only affect economic participations of persons providing investment management services.

Our recommendation

The considerable changes made to the UK tax treatment of DIMF and carried interest may affect existing as well as new structures and make it imperative for individuals providing investment management services in the UK to review their current arrangements with a view to determining what income or gains need to be reported to HMRC under self-assessment. Considerable complexity may arise, for example, where carried interest is held in an offshore corporate and trust structure, in so far as such carried interest will often be paid to a non-UK resident person but may still be treated as taxable income or gains arising to a UK based investment manager. Advice will then be required as to how the investment manager can best be put in funds to meet such income tax and/or capital gains tax liability without additional tax liabilities crystallising on extraction of funds out of the offshore structure. It should be noted that the reduction in the highest rate of UK capital gains tax from 28% to 20% for individuals as from 6 April 2016 does not apply to carried interest capital gains which remain taxable at the 28% rate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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