Income Tax Act 2007 section 809FZP

Secondary funds

Section 809FZP sets out special rules for how "secondary funds" — investment schemes that primarily acquire interests in other collective investment schemes — are treated when calculating the average holding period for income-based carried interest purposes.

• A secondary fund can treat its investment in an underlying scheme as a direct holding rather than looking through to the underlying assets, provided the investment is not designed to reduce the proportion of income-based carried interest arising to any person.
• Where a secondary fund holds a significant interest (at least £1 million or 5% of external investor amounts) in an underlying scheme, bespoke timing rules apply: subsequent qualifying investments are treated as made when the significant interest was first acquired, and disposals are not recognised until a "relevant disposal" threshold is reached.
• To qualify as a secondary fund, the scheme must, at inception, reasonably be expected to invest substantially all its capital in unconnected collective investment schemes, hold more than 50% of investments for at least 40 months, and draw more than 75% of its capital from external investors.
• A "qualifying investment" must meet strict conditions including arm's-length terms matching those of external investors, a maximum 30% holding in the underlying scheme, separate management teams, and no arrangements designed to reward the underlying scheme's investment managers.