UK government calls for evidence on carried interest tax ‘loophole’

HM Treasury recently published a paper seeking input from stakeholders across the UK. The government has confirmed its intention to engage proactively with stakeholders on changes and will “seek to protect the UK’s position as a world-leading asset management hub, recognising that the sector channels vital investment across the UK and will play an important role in the government’s mission to boost economic growth”.

Carried interest refers to the performance-related rewards received by fund managers, primarily in the private equity industry. Unlike other rewards, carried interest can currently be taxed at capital gain tax rates of 18% and 28%, compared with income tax rates of up to 45%. However, the government believes that the current tax regime does not accurately reflect the economic characteristics of carried interest or the risk assumed by fund managers.

Hatice Ismail, funds tax expert at Pinsent Masons, said: “The carried interest rules have already been significantly amended in various way since 2015, including to close down common tax planning arrangements with the aim of taxing carried interest returns in the UK in a way that better reflects true economic returns to individual managers. Arguably, further reform of the taxation of carried interest by the new Labour government is unwarranted and will serve to make the post-Brexit UK a less attractive place for fund managers to do business.”

The government has said it will take written submissions on the taxation of carried interest generally. It is also specifically seeking responses to three questions: how the tax treatment of carried interest can most appropriately reflect its economic characteristics; what the different structures and market practices are with respect to carried interest; and whether there are lessons that can be learned from approaches taken in other countries.

The government notes that there are a range of circumstances in which carried interest is received, and that the characteristics of the reward will not be the same in all cases. The government is particularly interested to understand how these differences should be taken into account as part of its reforms. While many other countries have specific regimes for the taxation of carried interest, their detail and conditions for access vary.

The government is seeking input from all interested parties, with written responses required before 30 August. Treasury officials will meet with industry experts, professionals and academics to discuss the next steps.