Key Facts
- •Appellants are private equity investors entitled to carried interest in 2016.
- •Appeals concern amendments to tax returns due to Finance (No. 2) Act 2015 (F(No.2)A 2015) changes.
- •F(No.2)A 2015 removed the 'base cost shift' advantage for carried interest.
- •Grandfathering provision in s. 43(2) F(No.2)A 2015 applies to carried interest arising before 8 July 2015.
- •Main issue: whether the grandfathering provision applies to Appellants' carried interest.
- •Carried interest arose after 8 July 2015, following the disposal of the Audley Court investment.
- •Audley Court investment was the last disposal and was sold at a loss, but its sale was crucial to reaching the 9% IRR hurdle for carried interest payment.
- •HMRC argued that the carried interest arose 'in connection with' the post-8 July 2015 Audley Court disposal.
- •Appellants argued that the carried interest was 'in connection with' pre-8 July 2015 disposals that generated the profits.
- •The Audley Court investment was a Qualifying Corporate Bond (QCB).
Legal Principles
Interpretation of 'in connection with' requires considering surrounding words and wider context; both broad and narrow meanings are possible.
London Luton Hotel BPRA Property Fund LLP v. HMRC [2023] EWCA Civ 362
Presumption against retrospective legislation.
Arnold v. Central Electricity Generating Board [1988] AC 228
Meaning of 'carried interest' and 'arise' as defined in TCGA 1992 and ITA 2007.
TCGA 1992 s.103 KA-KH, ITA 2007 s. 809 EZC-D
Grandfathering provision in s. 43(2) F(No.2)A 2015 only applies to carried interest arising in connection with asset disposals before 8 July 2015.
F(No.2)A 2015 s. 43(2)
Qualifying Corporate Bonds (QCBs) are considered 'assets' under TCGA 1992.
TCGA 1992 ss. 21, 117
Outcomes
Appellants' appeals dismissed.
Carried interest arose after 8 July 2015 in connection with the Audley Court investment disposal, meaning the grandfathering provision didn't apply. The Court found that the Audley Court disposal, while resulting in a loss, was essential to achieving the IRR threshold and triggering the carried interest payment. The court rejected the argument for apportionment.
Amendments made by closure notices confirmed.
The carried interest fell under the new regime because the Audley Court investment, the trigger for payment, was disposed of after 8 July 2015.