HM Treasury consultation on UK carried-interest tax reform gets expert input from Osborne Clarke
Published on 7th Feb 2025
The UK must champion certainty and simplicity, tax specialists have urged government prior to proposed changes
The UK government's consultation on the proposed changes to the tax treatment of carried interest drew a detailed submission and comment from Osborne Clarke before its close on 31 January 2025.
The consultation was published on 30 October as part of the Autumn Budget 2024, when the government also announced fundamental changes to the way that carried interest will be taxed in the UK. These changes follow the government's call for evidence last summer, to which Osborne Clarke also responded.
Fund managers are currently taxed on the receipt of carried interest in the form of capital gains at a rate of 28% for the highest earners. This rate will increase to 32% from 6 April 2025 on a temporary basis.
Revised regime
From April 2026, the government proposes to bring carried interest returns within a revised regime under the income tax framework where returns are taxed as "deemed trading income" (at combined income tax and national insurance contribution rates of up to 47%). However, where certain qualifying conditions are met, a discount mechanism will apply so returns are taxed instead at an effective tax rate for additional rate taxpayers of around 34.1%.
In considering potential qualifying conditions, the government's consultation asked for feedback on the introduction of a minimum co-investment condition and a minimum personal holding-period condition (alongside the existing condition looking at the fund's average investment holding period). The aim of the consultation was to gather feedback on these proposed additional qualifying conditions and their design.
Additional qualifying conditions
One of the most important considerations for industry stakeholders is to keep the UK competitive on the global stage, which encouragingly the government understands. Osborne Clarke's response highlighted that the introduction of any additional qualifying conditions – and how prescriptive and complex they are – should be considered in light of the fact that the effective tax rate in the UK for carried interest returns will be one of the highest in Europe.
Osborne Clarke welcomed the government's aim to keep the rules as simple as possible and suggested, where possible, a principles-based approach should be adopted to take into account the diverse fund structures and strategies to which the rules will apply.
The submission also emphasised the importance of the government providing clear and detailed guidance on the new rules to avoid unnecessary uncertainty. "Grandfathering" provisions also need to be considered for existing funds, some of which may have been established many years ago and could face significant challenges in restructuring to comply with any new qualifying conditions.
Minimum GP commitment
Osborne Clarke noted that it was reassured to see that, if a minimum required general partner (GP) commitment is introduced, the government would consider testing this at team level, rather than on an individual-by-individual basis. However, the response highlighted the practical difficulties and challenges, even on a team level, around funding and tracking a GP commitment – which would need to be carefully considered and balanced.
The response to the consultation recommended that any minimum GP commitment levels should reflect market practice and should not deter fund managers from raising capital or from bringing forward junior members. Additionally, the response highlighted the need for flexibility in the timing and structure of GP commitment arrangements.
Personal minimum holding period
The response proposed that any time-based condition in connection with the holding of carried interest rights should be designed to avoid penalising early successful funds and should be aligned with existing law. Osborne Clarke also raised concerns around reallocating carried interest for new hires or promotions.
Osborne Clarke comment
It is encouraging that the government is recognising the concerns of stakeholders and continuing to engage with the industry. The government has committed to publishing a technical consultation on any draft legislation that flows from this and we expect this later in the year.
If you would like to discuss the consultation and our response in more detail, please speak to one of the contacts below.
