The Autumn Statement announced proposals to change legislation in respect of the taxation of management fees received by investment fund managers and draft legislation was subsequently published in the Finance Bill 2015. The proposed new legislation is intended to come into effect from 6 April 2015 with no grandfathering provisions in respect of existing arrangements.
In the past it was possible for Collective Investment Schemes (“CIS”) to have a partnership as their General Partner (“GP”) and for a General Partner Profit Share (“GPPS”) to be allocate to the General Partner. The GPPS was often structured as an advance profit share and until such times as this was matched with a profit within or from the CIS, this was not taxable. The GP would often pay a portion of the GPPS on to an affiliated onshore investment manager or adviser and some of the GPPS would remain offshore and often untaxed. The offshore untaxed GPPS could be loaned to individuals and because it was not necessarily considered income in nature, would be untaxed in the hands of the individuals. Other similar arrangements also existed.
The proposed legislation seeks to change this…
From 6 April 2015 it is proposed that where an individual performs investment management services in respect of a CIS and there are in place arrangements (and at least one partnership) such that a management fee arises to an individual and some of that management fee is untaxed, then the untaxed amount could be considered to be a ‘disguised fee’ for the purposes of this legislation and the individual shall become liable for income tax (and National Insurance) in respect of the disguised fee.
The draft legislation defines a management fee as a sum that arise to an individual from a CIS that:-
- does not constitute carried interest;
- does not arise from the repayment of an investment made by the individual in the CIS; or
- does not constitute a commercial return on an investment made by an individual in the CIS.
Anti-avoidance provisions included in the draft legislation are widely drawn and state that ‘no regard is to be had to any arrangements the main purpose, or one of the main purposes, of which is to ensure that this section does not apply…’
The draft legislation also contains provisions such that where the investment management services are to any extent carried on in the UK then the trading income is considered to arise wholly within the UK. This will mean that UK resident non-domiciled individuals should not be able to shelter the income tax charge on the disguised fee through electing for the Remittance Basis Charge.
Those interested in the detailed wording of the proposed legislation can find this HERE, page 70 onwards.
For further information or specific advice please contact Justin Moore or Leanne O’Connor.