Carried Interest and disguised investment management fees

• the private capital industry makes a significant contribution to the UK economy
• the tax treatment of carried interest is important in attracting and retaining talent in the UK
• UK-based managers are more likely to invest in the UK
• changes should be forward-looking, and
• there should be full consultation on the detail of any changes.

Carried interest election to assist with double tax relief claims

A new election has been introduced for tax years 2022-23 onwards, to allow UK resident investment managers to accelerate their tax liability relating to carried interest. This is to assist them to claim double tax relief in another jurisdiction (notably the US). This addresses an issue that arose following an update to HMRC guidance in January 2022, which meant that UK resident managers with tax liabilities in other countries could be subject to tax twice on the same carried interest entitlement, without being able to claim double tax relief. The BVCA worked closely with HM Treasury and HMRC on the election, which, although not a universal solution, may provide a resolution for many affected individuals. We published a Policy & Technical Alert in March 2023 containing more information on this issue.

OTS CGT review of July 2020

In July 2020 the Office of Tax Simplification published a review of capital gains tax. We responded to the review and produced a summary document on carried interest which includes international comparisons. We also published a comment piece following the OTS’s interim report and the New Horizons Report showcasing how the industry contributes to the UK economy and can help address a range of policy challenges and opportunities. We engaged closely with officials and stakeholders ahead of the 2021 Spring and Autumn Budgets and no changes to CGT were announced. The government published a response to the OTS report in November 2021 where they announced simplifications to the CGT regime and that they would keep the regime under review (but did not officially accept or reject recommendations from the OTS’s first report which discussed aligning the CGT rate with income tax rates).

Changes to the taxation of carried interest in 2015 and 2016

The disguised investment management fees (DIMF) rules were implemented to identify amounts received by investment managers that are, in substance, management fees and ought to be subject to income tax. The rules include specific exclusions for carried interest and co-investment returns, which are defined in legislation.

In July 2015, the government announced changes to the capital gains tax treatment of carried interest which were designed to ensure that “individuals will normally be charged to capital gains tax on the full amounts they receive in respect of their carried interest”. Further changes were introduced in April 2016, which mean that, in some circumstances, carried interest (however it is structured) can be treated as chargeable to income tax. The regime was introduced to address government concerns that the previous carried interest tax regime (applied to carried interest paid out to private equity and other long-term investment funds) was being accessed by managers of short-term (essentially trading) funds.

The BVCA Taxation Committee engaged in significant and regular dialogue with HMRC and HMT on the accompanying guidance for both the DIMF and carried interest legislation. In October 2020, HMRC published the following guidance in its Investment Funds Manual:

• IFM36000 - Disguised investment management fees
• IFM37000 - Carried interest

Our dialogue on the carried interest guidance resulted in changes to the published version. Guidance related to the income-based carried interest rules is yet to be published.