On 29 July His Majesty’s Treasury (HMT) made a request for stakeholders to provide evidence and comments on proposals to reform the taxation of Carried Interest. The Chartered Institute of Tax (CIOT) have now provided a robust response.
As background, Carried Interest is broadly the share in profits that are distributed to an Investment Manager (IM) after an asset is purchased by a Private Equity fund (which the IM provides management services to) and is subsequently sold at a gain. In most cases that profit is classified as a capital gain and taxed at a special Carried Interest capital gains tax rate of 28% (18% for basic rate taxpayers).
The headlines and speculative commentary in the national press have suggested a move away from the typical capital gains tax treatment of Carried Interest to an income tax charge.
We have many clients that work in Private Equity who are concerned by the Government's announcements to reform and recategorise the taxation of Carried Interest.
We share those concerns and are pleased to share a response to the HMT call for evidence, which was made by our regulatory body the Chartered Institute of Taxation (CIOT), the full response can be found here.
The CIOT urges the government to fully understand the range of commercial arrangements that give rise to carried interest before enacting any legislation. They emphasise the importance of considering international competitiveness and the potential implications of changes to the UK regime.
The key points to take from the CIOT response are as follows:
- The CIOT supports the government's consultation on the rates and treatment of carried interest and urges consideration of all potential commercial implications before final legislation is put forward.
- They also advise including the disguised investment management fee rules in the review, particularly concerning non-UK resident individuals and entities.
- The CIOT outlines the typical fact pattern under which carried interest gains arise, involving investment funds constituted as limited partnerships or companies and the role of investment managers.
- They discuss the distinction between income and capital gains, highlighting the complexity and blurred boundaries in this area.
- The CIOT suggests defining a statutory "safe harbour" to clarify what constitutes proper risk-taking and should be taxed as capital gains.
- The document identifies the rates of tax paid in France, Germany, Italy and Spain on Carried Interest and stresses the need for the UK to remain competitive within the global market.
- They also highlight the need for improved clarity in the disguised investment management fee rules and consideration of the wider territorial aspects of the rules.
If you would like advice on any aspect of Carried Interest or assistance with reporting Carried Interest in UK tax returns, please do not hesitate to contact us.
