Carried interest, co-invest and tax planning
The new rules affecting the compensation of investment managers have now come into full effect.
Broadly, these are as follows:
- Carried interest now falls into one of two categories; Income Based Carried Interest (“IBCI”) which is subject to income tax and NIC, and carried interest which is not IBCI, which is subject to capital gains tax (“CGT”).
- Carried interest is wholly IBCI if the relevant fund holds its assets for an average of 3 years or less. Carried interest will be partly IBCI if the average holding period is between 3 and 4 years. If the average holding period is more than 4 years, the IBCI rules will not apply.
- Carried interest which is not IBCI and is therefore taxed as capital gain is now treated as a UK asset for CGT purposes to the extent that it relates to investment management services supplied in the UK. There is an apportionment where services are supplied partly in the UK and partly abroad.
- Despite the general reduction in CGT rates for other classes of assets, the 28% CGT rate is retained for carry which is not IBCI.
These changes do not affect co-invest arrangements. They are also limited to carried interest arrangements which involve the use of a partnership.
The new rules have two rather unhelpful consequences:
- The remittance basis is no longer available to UK resident non-domiciled investment managers for carry earned from the provision of investment management services in the UK.
- Offshore trusts are also no longer effective vehicles for sheltering carry gains to the extent that investment management services are provided in the UK, although they may still be effective for co-invest.
As a result of these changes, it is likely to be necessary for those affected, especially non-doms, to review how they report carry on their tax returns and consider afresh their tax planning arrangements.
It is essential that the reporting of carried interest receipts is handled by advisers with specialist knowledge of this area. We have seen examples of incorrect reporting by non-specialist advisers, which could result in HMRC enquiries, additional or unnecessary tax liabilities and the imposition of interest and penalties.
We can also advise on the use of alternative structures which could offer a solution not just for non-doms but also for UK resident and domiciled individuals with carry and co-invest that they wish to shelter from UK tax. Please contact us if you would like a free consultation to discuss how we can assist.