Introducing an elective accruals basis for the carried interest rules
Published 15 March 2023
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Who is likely to be affected
Individuals who provide investment management services to investment funds and receive sums of carried interest which are subject to tax in more than one jurisdiction.
General description of the measure
In the UK, carried interest that is charged to Capitals Gains Tax (CGT) is taxable at the time it arises to an individual.
Individuals may be liable to tax in more than one country on the same income or gain. To avoid double taxation in such situations, the UK has negotiated treaties with more than 100 countries.
UK resident individuals who pay tax on carried interest are sometimes unable to claim double taxation relief from other countries because carried interest is recognised and charged to tax at a different time in the two jurisdictions.
This measure will introduce a new elective basis of taxation for carried interest which will tax carried interest at an earlier time than under the current rules.
Policy objective
This measure aims to make the tax system fairer and simpler by enabling individuals to better align the time a tax liability arises in the UK for carried interest with that of other jurisdictions.
Background to the measure
This measure was announced at Spring Budget 2023.
Detailed proposal
Operative date
This measure will have effect on and after the date of Royal Assent of Spring Finance Bill 2023. Amendments made under this measure will have effect for the tax year 2022 to 2023 and subsequent tax years.
Current law
Current law on the taxation of carried interest is at sections 103KA to 103KH of the Taxation of Chargeable Gains Act (TCGA) 1992. Section 103KA provides that a chargeable gain is treated as accruing at the time that the carried interest arises to the relevant individual.
Proposed revisions
Legislation will be introduced in Spring Finance Bill 2023 to insert new sections 103KFA to s103KFD to TCGA 1992. These sections will enable any individual who expects to receive carried interest to make a voluntary and irrevocable election for their carried interest to be taxed in the UK on an accruals basis. The legislation provides a calculation for how individuals who have made an election should calculate the amount of carried interest that has accrued to them in each tax year.
Summary of impacts
Exchequer impact (£m)
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
|---|---|---|---|---|---|
| — | +80 | +10 | +10 | +10 | +10 |
These figures are set out in Table 4.1 of Spring Budget 2023 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2023.
Economic impact
This measure is not expected to have any significant macroeconomic impact.
Impact on individuals, households and families
This measure is expected to impact on approximately 30-50 individuals per year working in the investment management industry who receive amounts of carried interest which are subject to tax in more than one jurisdiction. Such individuals will be required to familiarise themselves with the new rules but are not expected to incur additional costs. This measure is expected overall to improve individuals’ experience of dealing with HMRC as we anticipate that claiming double taxation relief between jurisdictions will be easier.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not expected that there will be adverse effects on any group sharing protected characteristics.
Impact on business including civil society organisations
There is no impact on businesses as this measure only affects individuals.
Operational impact (£m) (HMRC or other)
HMRC will incur a small amount of operational impacts for this change which are estimated to cost £50,000.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be monitored through information provided on tax returns and through communication with taxpayers and practitioners affected by the measure.
Further advice
If you have any questions about this change, please contact the HMRC financial services policy team, email: [email protected].