Autumn statement causes carried interest confusion

The change to the way in which carried interest is taxed follows a consultation launched after the summer budget, in which the UK chancellor removed deductions on capital gains tax charged to private equity individuals on carried interest, causing an immediate uplift from the 18% rate to 28%.

In his most recent statement, Osborne announced that legislation will be introduced to ensure that carried interest returns received by fund managers will be subject to the full rate of capital gains, with only limited deductions allowable.

According to Deloitte: "The measure is designed to prevent tax being paid at less than the full rate due to the allocation of tax basis to individual fund managers from the application of the base cost shift rules or allocation of income and gain by a fund partnership."

Since yesterday's announcement, the lack of clarification around what this change actually means for private equity has caused much confusion.

Ceinwen Rees, a tax associate at Debevoise & Plimpton, said: "The UK Government has announced plans to tax carried interest as income, except where the underlying fund undertakes 'long term' investment activity. No detail has been provided yet but we expect the legislation implementing this announcement to be published on 9 December.

"The key question is what constitutes 'long term'. 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. Although nothing contrary to this has been published, we are aware the government has informally indicated that a longer period may be required before carried interest begins to qualify for capital gains tax treatment."

The BVCA has sent out a message to its members, stating that the government agrees and has recently re-affirmed that private equity and venture capital actviities do constitute long-term investments. The note also said: "They will be publishing draft legislation next month putting forward relevant definitions of "long-term" and "short-term" investment. The BVCA has been in intense talks with HMRC over the details of this legislation and will continue that dialogue to ensure that stated ministerial intentions apply to every section of our industry."

 

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• Topics
• UK / Ireland
• Regulation
• United Kingdom
• tax
• UK Budget