The Government has confirmed that it intends to take "decisive action" to close the carried interest "loophole" in line with its belief that "the current tax regime does not appropriately reflect the economic characteristics of carried interest and the level of risk assumed by fund managers".
Carried interest is a performance incentive payable to fund managers. Once external investors receive a specified return (the "hurdle"), senior executives in the fund share in any further return on investment, usually receiving 20% of the profits above the hurdle with the remaining 80% going to the external investors. Provided the fund is structured to fall within the UK's carried interest tax regime, the carried interest will be taxed as a capital gain at the special rate of 28%. Whilst this is higher than the usual maximum capital gains tax rate of 20%, it remains significantly lower than the maximum income tax rate of 45%.
The Labour Party has long said that it disagrees with the carried interest regime and that carried interest should instead be taxed at income tax rates on the basis that it is, in reality, more akin to the profits of a trade than a capital gain. It is clear from the call for evidence that the Government intends to take some action on this topic; what that action will be is much less clear. The document states that the Government will make "impactful change" while recognising the need to "protect the UK's position as a world-leading asset management hub".
A previous article explained how the carried interest regime interacts with the UK's treatment of trusts settled by non-UK domiciled individuals. From 6 April 2025, such a trust is going to be taxed differently (latest non-dom article). However, there are a vast array of drafting and policy choices to be made in implementing the abolition of protected settlements and excluded property trusts as applied to structures holding carried interest. For example, in what circumstances will carried interest which arises to a trust be assessable for income tax purposes on the settlor? The Devil, as always, will be in the detail.
Those wishing to respond to the call to evidence have until 30 August 2024 with further details on how to do so here.