Call for evidence on UK tax treatment of carried interest draws Osborne Clarke response

The new Labour government's call for evidence on the tax treatment of carried interest closed on 30 August 2024, with Osborne Clarke's response highlighting the current regime's contribution to the UK economy.

The UK funds regime has to operate on a highly competitive international stage and "grandfathering'" provisions should be considered for the protection of existing funds, Osborne Clarke told the consultation.

The call for evidence opened on 29 July as part of Labour's commitment to take action over the carried interest "loophole", which prior to the election it had been vocal about its plan to close.

Currently, fund managers are taxed on the receipt of carried interest in the form of capital gains at a rate of 28% rather than the income tax rate of 45% for the highest earners.

Government versus industry concerns

The government believes that this regime does not appropriately reflect the economic characteristics of carried interest and the level of risk assumed by fund managers in its receipt.

However, there has been rising pressure from the private equity industry over a move to tax carried interest at income tax rates, as this would force firms to relocate abroad and reduce the UK's attractiveness for funds with carried interest participants.

More widely, the industry has warned that this could have a serious impact on the UK economy.

The call for evidence set out three broad questions on which the government would particularly value input from stakeholders, although how the government intends to change the tax treatment of carried interest remains unclear.

Consultation response

Osborne Clarke, in its response to the call for evidence, noted that the tax regime already includes provisions to ensure that carried interest can be taxed as income where deemed appropriate.

It highlighted that the tax treatment of carried interest has been developed over many years. Moreover, the UK's taxation of carried interest returns is similar, if not higher, than some other international regimes. 

This is a vital consideration when positioning the UK as a world-leading asset management hub, as carried interest is an integral part of attracting and retaining top talent in the asset and fund management sector and, accordingly, the fund management industry in the UK. 

The UK's carried interest regime already taxes capital gains at a rate of 28%, which is higher than the ordinary UK capital gains rate of 20%.

"Grandfathering" provisions also need to be considered to protect existing carry schemes from the impact of taxation changes that would not have been in view at the time they were established, Osborne Clarke emphasised.

Osborne Clarke comment

Despite the government's case for reform of carried interest, it is encouraging that its call for evidence stated that it will seek to protect the UK’s position as a world-leading asset management hub – and that it is engaging with the industry and other stakeholders on this area of concern.

A further announcement on the reform of carried interest will be made at the Budget on 30 October, but we hope that any next step will involve further dialogue with stakeholders and a full consultation on draft legislation before any changes take effect.

If you would like to discuss the consultation and our response in more detail, please speak to one of the contacts below.