UK resident investment managers who receive carried interest will be able to elect to pay their UK tax liabilities earlier so that their UK tax position aligns with other jurisdictions in order to claim double tax relief. Under the new legislation, effective from 6 April 2022, it will be possible to make a voluntary and irrevocable election for carried interest to be taxed on an accruals basis and the legislation will provide a formula to calculate the amount arising in each tax year.
A practical problem for US/UK taxpayers
This change has been introduced with UK resident US taxpayers in mind to help solve a practical issue they face with claiming double tax relief in the US. Taking a US citizen living in the UK as an example, they are exposed to both US and UK taxes on their carried interest and because of the difference in tax treatment- in the US carried interest is taxed as it accrues in the fund whilst in the UK it is usually taxed when it is paid out – they may find their US and UK tax liabilities arise in different tax years. For UK residents, the UK will normally have primary taxing rights on the carried interest and therefore the double tax relief claim will need to be made in their US tax return. The issue they face is that there are strict time limits for amending tax returns in the US and if there are a number of years between the US and UK liability, they may find they are out of time to reclaim the tax in the US.
Change in HMRC guidance
Until February 2022 dual individuals in this scenario relied on HMRC guidance "Prevention of Double Taxation" which had indicated that where more than one tax has been paid, it is possible to make an adjustment to your UK tax liability for the "other tax". However HMRC updated their guidance last year to exclude non-UK taxes from the adjustment.
Should I make the election?
This is unlikely to be a straightforward decision and will depend upon a number of factors including whether the individual is likely to leave the UK and their other income and gains. For individuals who are in the UK short-term a claim to be treaty resident in the US may provide a better outcome.
The legislation will have effect for the 2022/23 tax year onwards and therefore may need to be considered as part of the 2022/23 tax return preparation. This is a highly technical area and we would recommend you seek advice from your usual contact at Mercer & Hole.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.