Proposal to amend UK carried interest tax regime: Part two

Has HMRC looked to snatch defeat from the jaws of victory? In our second instalment, we look at the proposal to amend the UK carry rules, and how HMRC and HM Treasury may be missing a golden opportunity to create a more simplified regime.

Key points include:

• Expanding the IBCI test, by abolishing the ERS exclusion: in order for fund managers to benefit from the lower carry tax rates, the fund must hold assets for a minimum 40 months, and the existing exclusion for employees is to be abolished. This creates added complexity and reporting, and potential friction between fund managers and investors.
• IBCI and credit funds: the existing IBCI test is particularly onerous for credit funds, we set out how the rules should be amended.
• Minimum coinvest condition: this will present challenges to junior team members or those from certain socio-economic backgrounds, who may be unable to afford the coinvest amount. Further, the coinvest condition should be satisfied by the team as a whole and should not be a personal requirement for each individual fund manager to satisfy.
• Minimum holding period for carried interest at carry level: the rationale for such a requirement is very unclear, and together with the IBCI test would now create two minimum hold periods (one at fund level and one at carry level).

A simplified and competitive regime must be the overriding goal. Please contact Michael Graham to find out more.