The Chancellor Rachel Reeves had previously made her views on private equity returns clear during her time in opposition, particularly regarding carried interest.

The Government has released a call for evidence document seeking views from stakeholders. This move implicitly acknowledges the wider ramifications of any changes impacting the private equity industry.

Summary of the Government’s call for evidence paper

Background

• On 29 July 2024, the Chancellor of the Exchequer announced a commitment to take action regarding the ‘carried interest’ loophole. Carried interest, a performance-related reward received by fund managers in the private equity industry, is currently taxed at Capital Gains Tax (CGT) rates of 18% and 28%.

Carried interest reform:

• The Government believes the current tax regime does not appropriately reflect the economic characteristics of carried interest and the level of risk assumed by fund managers.
• Decisive action will be taken to reform this aspect of the tax system, says the government.

What is clear is that the UK, compared to the US and other regimes, already taxes carried interest in a more aggressive manner especially following the introduction of the Disguised Investment Management Fee (DIMF) rules in 2015 and subsequently the income-based carry rules. The latter was actually designed to capture those scenarios where the government of the day did not feel the investments were held for adequate periods to reflect an investment nature and appropriate risk.

Protecting the UK’s asset management hub

• The Government seeks to maintain the UK’s position as a world-leading asset management hub, recognising the sector’s vital role in channelling investment across the UK and boosting economic growth.

Call for evidence:

• The Government is launching a call for evidence to gather insights and input from stakeholders.
• Officials will engage extensively with experts across industry, professions, academia, and other relevant areas.
• Written representations are encouraged and should be submitted by 30 August 2024.

The Government is particularly interested in feedback on the following areas:

• How the tax treatment of carried interest can most appropriately reflect its economic characteristics.
• The different structures and market practices with respect to carried interest.
• Lessons that can be learnt from approaches taken in other countries.

Engagement details

• The Government welcomes written representations and meetings with stakeholders to discuss the issues in play.
• Although submissions should be provided by 30 August, meetings should be requested before this date. Early engagement is welcome.
• A further announcement is expected at the Autumn Budget on 30 October 2024.

As a firm with significant expertise in the private equity sphere, we intend to engage with the Government in respect of the consultation, ensuring our views and those of our clients are represented. Therefore, if clients or advisors wish to express their thoughts and views on the above, please do not hesitate to contact us.

Conclusion

It is reassuring to see that the Government is consulting on any changes. What is certain is that changes are coming to the taxation of carried interest returns. Whether this involves re-characterising it as income, extending the income-based carry rules, or simply changing the CGT rate for carried interest remains to be seen. Importantly, private equity executives should be talking to their advisors.

Should anyone wish to discuss the new rules and their possible implications, please don’t hesitate to contact Majid Hussain, Partner and Head of Private Client.