Carried interest – a summer call for evidence

Yesterday the Chancellor, Rachel Reeves, made several key economic announcements in Parliament following a spending audit that suggested public spending pressures. The Autumn Budget was confirmed to be on 30 October 2024.

In this article we focus on carried interest – a form of performance-related reward received by fund managers, primarily within the private equity industry. Carried interest is an incredibly complex area of taxation, with arrangements and outcomes varying significantly from case to case.

Before reaching Government, Labour had already made their intentions clear. If elected, they would seek reform to carried interest’s tax status via closure of a stated loophole. Labour announced they would ensure that carried interest, representing performance-related reward, is subject to income tax rather than (in some cases) capital gains tax. Labour’s manifesto published in June 2024 estimated the exchequer would net an additional £565 million by making this change.

Following the election, the Government suggested that where executives provide their own capital at risk, existing treatment would remain in place (i.e. in some cases capital gains tax).

Rather than merely announcing a definitive change to the UK tax regime on carried interest, yesterday HM Treasury issued an open call for evidence. This aligns with Labour’s commentary following the election that they would consult with industry pre implementation of any change. The publication itself provides no detail on proposed future rules and instead asks the following three questions:

1. How can the tax treatment of carried interest most appropriately reflect its economic characteristics?
2. What are the different structures and market practices with respect to carried interest?
3. Are there lessons that can be learned from approaches taken in other countries?

Alongside many others in industry, we will respond to the call for evidence during August 2024.

It is difficult to read too much into the future changes at this stage. Whilst HM Treasury’s publication refers to decisive action being taken, on the other hand, it refers to Government seeking “to protect the UK’s position as a world-leading asset management hub”. The asset management sector is a key part of the economy and HM Treasury will be mindful that significant changes could drive behaviour. Together with changing rules to non-dom taxation in the UK, this will be a key consideration for some firms operating in this area.

It is encouraging that the publication recognises the key role of asset managers in the sector “channels vital investments across the UK, and will play an important role in this Government’s mission to boost economic growth”.

Following the engagement period, a further announcement will be made at the Budget on 30 October. We will continue to monitor the changes and will provide further comment in due course.

Please do reach out if helpful to discuss how these changes might impact you or your clients.