HMRC internal manual

Investment Funds Manual

IFM37420 - Prevention of double taxation: Double taxation adjustment

Double taxation adjustment

TCGA92/S103KE(6)-(8)

The value of adjustments made will not exceed the lesser of:

  • The capital gains tax charge in respect of the carried interest under the new legislation; and
  • The other tax paid.

Note that, when considering an adjustment, the other tax must have been paid.

Subject to the next paragraph, an adjustment will not be made if the sum may become chargeable to another tax or if the other tax has only been charged and not paid. Where the other tax has been paid, the individual should file their tax return for the year in which the carried interest arises and claim under these rules for an adjustment to be made in that tax return. If another tax is paid after the capital gain tax (CGT) has been paid, the individual will be able to make a claim to avoid double taxation by amending their tax return or by other means in line with normal rules and time limits rather they relying on TCGA/S103KE(7).

Where a sum of carried interest is charged to both CGT under these rules and also income tax in the same year (for example, where the sum represents interest or dividend income), resulting in two charges in respect of the carried interest, a claim can be made in the appropriate tax return so that the appropriate liability is paid and double taxation does not arise. HMRC will treat the income tax as paid by the payment made with the tax return for the year in question. In this particular scenario, it is therefore not required to have first paid the income tax before being able to claim relief. In all other instances, the other tax must have been paid before relief can be claimed.

Each component of the carried interest arising should be considered separately when determining relief due under TCGA92/S103KE. When a sum comprises a series of items, double taxation relief will be given on an item by item basis and not on a sum as whole. It will therefore only be possible to set the other tax due on a particular component of the sum arising against the CGT due on that component, rather than the CGT due on the sum as a whole. This is considered to be a just and reasonable approach, in accordance with TCGA92/S103KE(5).

Example 1

A sum comprises Item X, Item Y and Item Z. These will be dealt with as three individual items and not as one whole item. This would mean any other tax paid on Item X can only be set against the CGT due on Item X and not on the combined sum of CGT due on Item X, Item Y and Item Z.

Example 2

A sum of carried interest totals £2,000 and comprises debt principal of £1,000 and £1,000 of interest on that debt. Relief under TCGA92/S103KE would be given as follows:

  • The £1,000 of principal is “carried interest” and is charged to CGT at 28% under the carried interest rules amounting to £280.
  • The £1,000 of interest is also “carried interest” and so charged to CGT at 28% amounting to £280. Income tax charged at 45% will need to be paid and this amounts to £450.

Relief under TCGA92/S103KE allows full relief against the £280 of CGT due on the interest; the income tax payable of £450 effectively discharges the CGT liability due.

The income tax payable cannot also be set off against the CGT due on the principal. Income tax arises only in respect of the interest and not against the CGT of any other item within the £2,000 (£1,000 principal plus £1,000 interest) carried interest sum.

The net tax charge will therefore be £730:

CGT paid on principal: £ 280
CGT paid on interest: £ 280
Income tax paid on interest: £ 450
Total tax paid: £1,010

Double taxation relief: £ (280)
Net tax payable: £ 730