Carried interest: new legislation modified

Pat Dugdale

In our earlier blog we reported on draft legislation  which would tax carried interest and other asset managers’ performance incentives as trading income unless the average holding period of the fund’s assets was at least four years.  HMRC conceded that this was a work in progress and discussions have been conducted with the BVCA and other interested parties with a view to avoiding unintended consequences for the fund management industry.

It was announced today that the holding period required for full  capital gains (as opposed to trading income) treatment of carried interest would be reduced to 40 months. There is no mention in today’s Overview of Tax Legislation and Rates of any reduction in the three year period below which carried interest is taxed entirely as income so it remains to be seen whether this will remain unchanged, presumably with a sliding scale operating on holding periods between 36 and 40 months.

It is also stated that bespoke calculation rules will be introduced for additional asset classes including venture capital and real estate, alongside a number of other minor technical changes. More detail to follow.

On a less positive note, the Chancellor has decided to exclude carried interest (and residential property, excluding CGT exempt main residences) from the reduced CGT rates introduced for most other asset classes. It will therefore continue to be taxed at 28% despite the general rates coming down to 20% for higher rate tax payers and 10% for those liable to tax at only the basic rate. It is hard to see the rationale for this, but perhaps those still able to get CGT treatment  for their carried interest after recent Finance Acts should count themselves lucky!

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