{"id":2554,"date":"2023-03-27T14:33:00","date_gmt":"2023-03-27T14:33:00","guid":{"rendered":"https:\/\/iqeq-staging.j.layershift.co.uk\/?p=2554"},"modified":"2023-08-16T15:13:13","modified_gmt":"2023-08-16T15:13:13","slug":"what-uks-carried-interest-announcement-means-fund-managers-and-investors","status":"publish","type":"post","link":"https:\/\/iqeq.com\/insights\/what-uks-carried-interest-announcement-means-fund-managers-and-investors\/","title":{"rendered":"What the UK\u2019s carried interest announcement means for fund managers and investors"},"content":{"rendered":"
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On 15 March 2023, the UK Government announced its Annual Spring Budget with tax policy updates and the headline points included a most relevant item for the funds industry: carried interest.<\/strong><\/p>\n

In this article, we take a deeper dive into this significant announcement and summarise what the change means for fund managers and investors \u2013\u00a0the bottom line being that the tax policy change is good news for the people who receive carried interest.<\/em><\/p>\n

As the policy document states, \u201cUK resident individuals who pay tax on carried interest are sometimes unable to claim double taxation relief from other countries because carried interest is recognised and charged to tax at a different time in the two jurisdictions\u201d.<\/p>\n

Let\u2019s reflect on each aspect of this statement to understand how this measure helps such individuals avoid the onerous and unfair burden of double taxation:<\/p>\n

What is carried interest?<\/h3>\n

Carried interest is written into most funds\u2019 legal agreements (LPAs), and apportions a slice of a fund\u2019s profits* to the general partner of the fund.<\/p>\n

Most profits go to the investors (LPs) because they inject the majority of the capital for the fund to invest; LPs receive their profits on a sliding priority basis before the GP, which is calculated via a carry model.<\/p>\n

The slice that goes to the GP is to compensate the investment managers and founders of the fund for setting it up and managing profitable investments and generally doing a good job.<\/p>\n

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*A cautionary note on the usage of the term \u2018profit\u2019 \u2013 here it means surplus returns above fund contributions, which is not the same as accounting gross or net profit.<\/em><\/p>\n

How is carried interest taxed?<\/h3>\n

As we know, funds themselves are almost fully exempt from tax across the board, so zero corporation tax applies in most jurisdictions, but some VAT and small local taxes sometimes apply.<\/p>\n

When the GP receives carry, it allocates such surplus to the founders and investment managers, and when income reaches those individuals, that’s where it gets taxed.<\/p>\n

There is a long running argument about how the income should be taxed:<\/p>\n

Like wages and salaries \u2013 subject to income tax; the top band in the UK is 45% on earnings over \u00a3150,000<\/p>\n

As a chargeable gain \u2013 subject to capital gains tax, which in the UK is 20%<\/p>\n

In most countries the above tax disparity is similar to the UK and the rules all generally lean towards allowing carry to be taxed as a chargeable gain. This makes sense because carry is not guaranteed unless there are profits, thus it is best treated like irregular entrepreneurial gains.\u00a0Fund managers and fund founders will obviously always fight for that to remain, since the tax burden is much lower.<\/p>\n

What’s the problem with tax and carry?<\/h3>\n