A change to the tax treatment of carried interest ?
The Chancellor launched a call for evidence in relation to the tax treatment of carried interest. The call for evidence closed on 30 August 2024. Further announcements about the taxation of carried interest are expected on Budget Day (30 October 2024).
Carried interest is a form of performance-related reward received by fund managers, primarily within the private equity industry. It is a share of profits which fund management executives received by virtue of ownership of an interest in the fund's assets.
Unlike salary and bonuses, which are taxed at income tax rates (currently up to 45% for taxpayers in England, Wales and Northern Ireland and up to 48% for Scottish taxpayers) under current rules, carried interest is taxed at Capital Gains Tax (CGT) rates of 18% and 28%.
The call for evidence focussed on three main questions:-
- Question 1: How can the tax treatment of carried interest most appropriately reflect its economic characteristics?
- Question 2: What are the different structures and market practices with respect to carried interest?
- Question 3: Are there lessons that can be learned from approaches taken in other countries?
The call for evidence refers to the current tax treatment of carried interest as the "carried interest" loophole, so it seems likely that some changes will be made, though it is difficult to predict what approach the government will take. This is a complex area, and the government acknowledges that it also needs "to protect the UK’s position as a world-leading asset management hub".
Further announcements about the taxation of carried interest are expected on Budget Day (30 October 2024), which could include a more detailed consultation on specific proposed changes.
Contributors
Director of Corporate Tax
Partner
