A changing landscape - UK and US tax impact

1. 8 April 2016
Carried interest
A changing landscape –
UK and US tax impact
A changing landscape
Initial changes that came into effect as of 6 April 2015 were the first step towards a major shift in how
non-domiciled individuals (non-doms) residing in the UK and working in the asset management industry
will be taxed.
Since that date we have seen a number of further proposed changes, consultation periods and now
legislation which governs how those with carried interest will be subjected to UK taxation. Previously, a
non-dom UK resident individual may have been able to protect their carried interest from UK tax by
claiming the remittance basis of taxation, as long as the funds remained offshore. These new rules
remove that protection, partly or entirely, and will result in the carried interest (or at least part of it)
suffering UK tax when it arises.
This document details the different regimes that can apply and the tax impact of these on UK resident
non-doms. In addition, we provide some insight and look at areas to consider for those taxpayers that
may also be US individuals. This population may require further assistance to navigate through the
US/UK tax interactions, given the carried interest is also subject to US tax.

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© EY 2016 Carried Interest – A Changing Landscape 1
Timeline of developments
8 July 2015
New carried interest regime
Legislation is introduced to ensure that carried
interest arising to individuals is effectively taxed at
a minimum rate of 28%. This is achieved by
removing base cost shift whereby individuals set
investors’ base cost of the underlying asset
against the capital gain realised from their carried
interest.
From 8 July 2015, non-UK domiciled individuals
can only treat their carried interest as a foreign gain
eligible for the remittance basis to the extent that
the services relating to the carried interest are
performed outside the UK.
The reduced UK capital gains tax rate of 20%
effective 6 April 2016 does not apply to carried
interest.
6 April 2016
Income-based carried interest
legislation
Carried interest arising after 6 April 2016 will be income-
based carried interest (IBCI) and subject to tax at up to
47% unless the carried interest is an employment-
related security or the underlying assets of the fund
have been held for an average weighted holding period
of at least 40 months.
For non-doms, there is no ability to apportion IBCI
between foreign and UK sourced to enable remittance
basis protection. An exception may apply in certain
cases where individuals arrive in the UK and received
payments relating to services performed when non-
resident.
6 April 2015
Disguised Management Fee
rules
The DMF legislation taxes disguised fees
where the amounts have not previously been
subject to tax. Sums arising to individuals are
treated as trading or employment income
subject to tax at up to 47%.
Qualifying co-investment and carried interest
returns are excluded from the scope of the
DMF legislation.
6 April 2017
Deemed UK domicile
rules
From 6 April 2017 non-doms will
become deemed domiciled in the UK
after they have been UK tax resident for
15 of the previous 20 years.
Deemed-UK domiciled individuals will
no longer be able to claim the
remittance basis to protect their non-UK
source carried interest from UK tax and
therefore be subject to UK taxation on
their worldwide income and gains.
22 October 2015
Amendments to the meaning
of arising
The carried interest legislation is amended to
ensure that - where the benefit of the carried
interest is available for the benefit of connected
persons, such as family members, trusts and
beneficiaries - it is deemed to arise to the
individual.
There are now a number of carried interest regimes to navigate starting from 6 April 2015, when the Disguised
Management Fee (DMF) legislation was implemented, through to 6 April 2017 when the new deemed domicile
rules come into force.

3. Confidential — all rights reserved
© EY 2016 Carried Interest – A Changing Landscape 2
Carried interest flowchart
No YesIs the carried
interest
taxable as a
DMF?(1)
Is the carried
interest in
respect of an
employment-
related
security? (2)
Yes
No
No
Potentially taxed
at up to
Yes
Were some of
the investment
management
services
provided
outside the
UK? (4)
Potentially taxed
at a minimum of
(5)
Non-UK work
To the extent not
remitted to the
UK, potentially
UK work
Assumptions
1. Answer NO if the sum meets the definition of carried interest in the DMF legislation. At this point, do not consider
whether the sum is DMF income under the IBCI rules.
2. Employment-related security as defined in Part 7 of the Income Tax (Earnings and Pensions) Act 2003.
3. Tapered capital gains tax rates apply to carried interest arising from funds where the underlying assets were held on
average for between 36 and 40 months.
4. Apportionment of carried interest between UK-sourced and non-UK sourced assumes that the underlying assets giving
rise to carried interest are non-UK situs assets and assumes the individual is a non-dom.
5. 28% capital gains tax will apply as a minimum. Where carried interest is satisfied through an allocation of income (e.g.
interest or dividends), this will be taxed at up to 45%.
47% 28% 0%
The applicable UK tax rate will depend on the rules that are relevant to each particular event that generates carried
interest arising to an individual. This may differ each time carried interest arises as various factors need to be
considered and can range from 0% to 47%. The following flowchart provides an overview of the process to
determine which rules apply and the subsequent tax that may be due.
Were the
underlying
assets held
on average
for more than
40 months? (3)

4. Confidential — all rights reserved
© EY 2016
For those caught by these rules that are US individuals (e.g. US citizens or green card holders) there may
be a need for further attention when considering their global tax position. As US individuals are already
subject to US Federal taxation on their worldwide income and gains, the new legislation may lead to the
same income being taxed in both the US and now the UK.
Carried Interest – A Changing Landscape 3
Tax implications for US citizens
There is the possibility that the new legislation may create real double taxation particularly in light of timing
and character differences. HM Revenue & Customs (HMRC) have suggested there may be an ability to
claim a tax credit against the UK tax charge as a ‘credit of last resort’ where this is the case. We await
further guidance on how this may apply to US taxes.
The real need for a joined up US and UK understanding of these rules is illustrated further as we move
closer to 6 April 2017 when the new deemed domicile rules come into force for UK income and capital
gains tax. This is a seismic shift in the taxation of non-doms who are long term UK residents. Through
our dual handling US/UK personal tax team we can provide joined up advice and compliance assistance.
Issues for US citizens in the UK
Timing issues
Is the carried interest taxable in the
US and the UK at the same time? If
not, may this result in temporary or
permanent double taxation issues?
Character of carried interest
Do both the US and UK recognise
the carried interest as having the
same character (e.g. capital
gain)? Who has the primary right to
tax it and how will tax credits
interact?
Entity mismatches
Does the carried interest vehicle
have the same tax status in the UK
and US – corporate/partnership? If
not, does this create timing or
character issues?
US tax elections
Have US tax elections been
made in the structure that may
create timing or character
issues?
Impact on estimated tax payments
Payments on account and estimated
tax payments may require closer
management to recognise tax credits
most appropriately and manage cash
flow issues.
US source?
Approaches may differ depending on
whether the carried interest is made up
of US source components (e.g. US
dividends) or from a third country
source (i.e. non-US and non-UK
assets).

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DLC_2016_0036 (eDTP160308) Carried Interest – A Changing Landscape (UK and US)
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Contacts:
For further information, please contact
one of the following or your usual EY
contact:
Darrin Henderson
Email: dhenderson@uk.ey.com
Tel: 020 7951 2423
James Murray
Email: jmurray@uk.ey.com
Tel: 020 7951 3745
Linda Henry
Email: lhenry@uk.ey.com
Tel: 020 7951 8618
Debbie Knowles
Email: dknowles@uk.ey.com
Tel: 020 7951 1995
Russell Morgan
Email: rmorgan@uk.ey.com
Tel: 020 7951 6906
Caspar Noble
Email: cnoble@uk.ey.com
Tel: 020 7951 1620
Dan Thompson
Email: dthompson@uk.ey.com
Tel: 020 7951 0144
Further questions and
how we can help
Certain aspects of the rules require further guidance.
We are in regular and direct communication with
HMRC on these areas. We are well placed to provide
guidance to both the fund and the individuals on the
impact of these rules, including but not limited to:
► Reviewing the structure from both a US and UK
perspective.
► Determining which of the rules apply, when the carried
interest arises, along with the rate of UK tax that may be
suffered.
► Advising on how to apportion the investment
management services between those performed inside
and outside the UK.
► Providing tax reporting for the fund, carried interest
vehicle and carried interest recipients.
► Providing joined up US and UK personal tax assistance
and guidance.
► Advising on the UK and US tax issues and interaction
and the ability to mitigate double taxation, where
applicable.
► Assisting with the preparation of UK and US personal tax
returns.