Autumn Budget 2024 – Investment funds

Carried interest

From 6 April 2025 – 2026 capital gains tax (CGT) rates on carry are set to increase from 28% to 32% however, interest income and dividend tax rates on carry will remain untouched (up to 45% and 39.35%, respectively).

From April 2026 fundamental changes will be made to the regime, and the two most important changes are:

• Flat tax rate of 34.625% (including Class 4 NICs) on capital gains, interest income and dividends (at the highest rate). This is particularly pleasing as it formed a cornerstone of our comments to HMRC and HM Treasury that a flat tax rate would give rise to a simpler and more straightforward carry regime. The big winners here will be Credit Funds where carry holders have hereto been subject to higher income tax rates of 45%, and will now be subject to lower tax rates. Venture will likely be subject to higher tax rates here as most carry returns consist of capital gains only and hereto have been subject to CGT rates at the 28% tax rate. Real estate, infrastructure and PE may already be subject to similar effective tax rates of c.34.625% depending on how they are structured.
• Abolishing the Employment-related securities (ERS) exemption with respect to IBCI rules. The IBCI rules, which impose minimum holding periods for Funds in order for carry holders to benefit from more favourable CGT treatment, have in most cases been ignored where the carry holder is an employee and the carry is an ERS. Removing this ERS exemption is a game changer, as all Funds will need to pay careful attention to the IBCI minimum holding periods. Crucially, there is to be no grandfathering, so all existing Funds will need to consider these rules from April 2026.

There will be a consultation on additional conditions to benefit from the flat tax rate, which includes a minimum co-invest obligation by the Fund management team and a minimum time period to hold carry before being paid out. This may favour "fund as a whole" structures, more common in European structures.

 

GP commitment / coinvest

Capital gains tax rates are set to increase from 20% to 24% (at the highest rates), effective 30 October 2024. Interest income and dividend tax rates will remain the same (up to 45% and 39.35%, respectively).

 

Non-doms

Abolition of the UK's 'non-dom' regime, and its replacement with a residence-based regime, will take effect from 6 April 2025.

 

Reserved Investor Fund (RIF)

The government has confirmed that it will proceed with the introduction of the Reserved Investor Fund (Contractual Scheme), a new unauthorised UK funds vehicle to promote investment into UK real estate. Legislation will be introduced before the end of the current tax year.

 

Employee tax

UK employer NICs (class 1) is set to increase from 13.8% to 15%, effective 6 April 2025.

 

Corporation tax

The rates for Corporation Tax (25%), Income Tax (45%), Employee National Insurance Contributions (at the highest earning threshold, 2%) and VAT (20%) remain unchanged – all at the highest rates.

 

Should you have any queries on the Autumn Budget, please reach out to your usual UK tax contact or one of the following.