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Carried Interest and disguised investment management fees

The disguised investment management fees (DIMF) rules were implemented to identify amounts received by investment managers that are, in substance, annual management fees and ought to be subject to income tax. The rules include specific exclusions for carried interest and co-investment returns, which are now defined in legislation.

In July 2015, the government announced changes to the capital gains tax treatment of carried interest which are designed to ensure that “individuals will normally be charged to capital gains tax on the full amounts they receive in respect of their carried interest”. Further changes were introduced in April 2016, which means that, in some circumstances, carried interest (however it is structured) can be treated as chargeable to income tax. The regime was introduced to address the government concerns the “traditional” carried interest tax regime (applied to carried interest paid out to private equity and other long-term investment funds) was being accessed by managers of short-term (essentially trading) funds.

In 2019, HMRC started making enquiries into the application of DIMF rules from 2015/16 onwards.

The BVCA Taxation Committee has engaged in significant and regular dialogue with HMRC and HMT on the accompanying guidance for both the DIMF and carried interest legislation. In October 2020, HMRC published the following guidance in its Investment Funds Manual:

Our discussions on this guidance continue as part of our regular meetings with HMRC and HMT. The draft guidance related to the income-based carried interest rules is yet to be published.


OTS CGT review

In July 2020 the Office of Tax Simplification published a review of capital gains tax. We responded to the review and produced a summary document on carried interest which includes international comparisons. We also published a comment piece following the OTS’ interim report and the New Horizons Report showcasing how the industry contributes to the UK economy and can help address a range of policy challenges and opportunities. We engaged closely with officials and stakeholders ahead of the 2021 Spring and Autumn Budgets and no changes to CGT have been announced. The government published a response to the OTS report in November 2021 where they announced simplifications to the CGT regime and that they would keep the regime under review (but did not officially accept or reject recommendations from the OTS’ first report which discussed aligning the CGT rate with income tax rates). Our dialogue on the carried interest guidance (related to previous legislation) also resulted in changes when it was published in 2020.