First-tier Tribunal (FTT) finds that grandfathering provisions on carried interest did not apply to final disposal of fund assets
In a lead case behind which the appeals of other members of a limited partnership are stayed, the FTT considered provisions introduced by Finance (No. 2) Act 2015 on the taxation of carried interest and similar returns. The new provisions included a grandfathering clause for carried interest which arose “in connection with the disposal of…assets of…partnerships” before 8 July 2015. In this case the carried interest arose on the final disposal of fund assets where previous asset disposals had taken place before 8 July 2015. Those earlier disposals were at a profit, but not sufficient to meet the fund’s carried interest hurdle of 9 percent internal rate of return (IRR) (i.e. the distribution ‘waterfall’). Although the last asset disposal was less than the acquisition price (so an overall loss), the proceeds were sufficient to take total distributions for the fund over the 9 percent hurdle and result in payment of carried interest. This last disposal and payment of carried interest took place after 8 July 2015. The taxpayer argued that the grandfathering provisions applied as the carried interest arose in connection with disposals prior to 8 July 2015 as that was where the overall fund profit derived from. However, the FTT agreed with HMRC’s analysis that the carried interest arose in connection with the disposal of the last asset and therefore the carried interest which arose post 8 July 2015 was taxable.