Ferguson-Davie & Edwards v HMRC: The proper construction of the carried interest provisions
The FTT has now handed down its first decision regarding the proper construction of the carried interest provisions at Part III, Ch 5 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) and the transitional/grandfathering provision at s. 43 (2) Finance (No.2) Act 2015.
This case was concerned with whether amounts of carried interest received by partners in a carried interest partnership (CIP), following the disposal of assets in real estate funds (the Funds), were chargeable under:
- The new carried interest provisions at s. 103KA(2) TCGA 1992, which was intended to ensure that the full amount of any economic gain enjoyed by carried interest holders on the disposal of assets was brought within the charge to tax; or
- The old regime, by virtue of the grandfathering provision, which had a cut-off date of 8 July 2015). Application of the old regime would result in carried interest holders paying tax on an amount less than their actual gain by the application of ‘base cost shift’.
All but one of the Funds’ assets were disposed of at a profit before the cut-off date. The remaining asset (ACT), the largest investment by far, was sold after the cut-off date at a loss; however, it was only on the disposal of ACT, that any carried interest was payable.
The grandfathering provision could only apply if the carried interest “arose in connection with” disposals which took place before the cut-off date, otherwise the carried interest would be chargeable under s.103KA (2) TCGA 1992.
By considering the surrounding words in the legislation and the wider context (which included the fact that the new carried interest legislation was introduced with immediate effect to prevent forestalling), the FTT determined that a narrow construction of the statutory language was appropriate such that, for the purposes of s.103KA(2) and the grandfathering provision (which both contained similar language), carried interest would only arise in connection with the specific disposal(s) which triggered the carried interest (rather than the disposal(s) which generated the underlying profit). In this case the carried interest was triggered by the sale of ACT (not the earlier disposals) so the grandfathering provision had no application and the main charging provision, s.103KA (2), applied.
Akash Nawbatt KC and Bayo Randle were instructed by HMRC.
The decision can be found in full here.
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