Budget 2016: Equitable changes for the private equity industry and carried interest holders?


Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Prior to the Budget, draft legislation had been published which would tax carried interest (and other performance incentives of asset managers ) as trading income. This is unless the average holding period of the fund’s assets was at least four years.

HMRC, British Venture Capital Association (BVCA) and other interested parties have been in discussions around this legislation following its publication. The Budget brought with it confirmation that the required holding period required in order to lock in the  capital gains treatment (thus avoiding it being classified as trading income and subject to higher rates of tax. would be reduced to 40 months.

We cannot find any confirmation (or otherwise) of any reduction in the three year period set out in the draft legislation below which a carried interest is taxed entirely as income. It seems difficult that a window of just four months will apply where sliding scale operates providing a pro-rata of any return between income and capital. However, that is where perhaps we are. Watch this space.

One may also have noted the surprise reduction in the headline rate of CGT to 20%. However, before those holding carried interests or residential property) this has been excluded and the 28% rate will remain for these ‘carved out’ asset classes.

It is difficult to fathom the logic behind this but perhaps one should not try too hard – especially if one wishes to retain his sanity.  Perhaps the better view is to breathe a sigh of relief that capital gains tax treatment on carried interest is available at all!

If you, or your clients, are concerned about these changes then please do not hesitate to get in touch

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