Government has listened to industry concerns on the tax treatment of carried interest
Government has listened to industry concerns on the tax treatment of carried interest
Commenting on the outcome of the Government’s Call for Evidence on the tax treatment of carried interest, Jennifer Wall, tax partner at BDO said:
The latest update on reforms to carried interest taxation shows that the Treasury has listened and responded positively to concerns raised by the industry over the undue complexity and anti-competitive nature of the rules originally proposed in October 2024.
Overall, this a positive outcome for the asset management industry. It should help ensure that the private equity sector remains committed to the UK and that the investment taps will stay on to support growth in the UK economy.
Among the measures contained in the latest update, the Government will not proceed with additional qualifying conditions of a co-investment and a personal holding period requirement to fall within the qualifying carried interest regime ie for carry to be taxed at a 34.075% tax rate. This is welcome news as many practical challenges were recognised in relation to introducing these requirements, particularly in relation to the co-investment condition.
There will be statutory limits to the international scope of the new rules, which should greatly lessen the impact on internationally mobile carried interest recipients.
The removal of the exemption for employment related securities to the Income Based Carried Interest rules (‘IBCI’) will go ahead. However, the Government intends to make several changes to the average holding period condition under the IBCI rules relevant for private credit funds and secondary funds. These changes are intended to make it easier for such funds to realise qualifying carried interest.
The Government has also confirmed that under the new regime, income tax and Class 4 NICs paid in the previous tax year on carried interest will be relevant to the calculation of any payments on accounts due. As such, cash flow management will be important for carried interest holders.
Jennifer Wall concluded “Draft legislation for technical consultation is expected to be published for consultation by 22 July 2025 – but it looks set to be more positive for private equity managers than many had feared.
ENDS
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