UK GPs await clarity on carry tax changes

A UK government statement last week failed to clarify when carried interest will still be eligible for capital gains tax treatment under new proposals, leaving fund managers in the country feeling uncertain about their future tax liabilities. 

Only carry from funds undertaking “long-term investment activity” will enjoy capital gains tax treatment, the government said. How long-term investment activity is defined has been a source of uncertainty since the Autumn Statement.  

Further details are expected in the upcoming Finance Bill 2016, the first version of which is expected in December. It follows a consultation launched in July to determine the criteria on which to decide how to tax investment fund manager rewards. 

“In its consultation document on this issue, the government indicated that an average holding period of six months will enable carried interest partially to qualify for capital gains tax treatment moving up to full qualification where a fund has an average holding period of two years,” said Debevoise & Plimpton tax associate Ceinwen Rees. 

He added: “Although nothing contrary to this has been published, we are aware the government has informally indicated that a longer period may to be required before carried interest begins to qualify for capital gains tax treatment.”

A market source said the government had indicated that an investment would have to be held for three to four years for the manager to qualify for capital gains tax treatment.

The same source said the new legislation was unlikely to apply to private equity and venture capital funds, for which changes to carried interest taxation have already been included in this year's Finance Act. Instead, it targets managers who trade, such as hedge funds.

“The view is that PE and VC are in one bucket which [HMRC] describes as long term investors,” he said.

In the government’s first budget announced in July, it raised the level of capital gains tax on carried interest accrued by fund managers to the full 28 percent rate and eliminated what it referred to as “loopholes”. These included the use of base cost calculations that have been included in existing legislation.

That immediate change to the way carry is taxed was a surprise given the discussions around disguised fee income rules that already took place last year, and concerns raised then about the lack of consultation with the industry. Disguised management fee legislation came into effect in April.