HMRC forces fund managers to pay more tax

HMRC forces fund managers to pay more tax

HM Revenue and Customs has published a paper clarifying how it plans to overhaul the taxation of ‘carried interest’ that fund managers use to reward themselves.

As previously reported by FTAdviser, the tax loophole that allowed fund managers to pay significantly less capital gains tax than actual economic returns is being closed. The rules were first announced in the Summer Budget and will apply from 8 July.

HMRC confirmed in the paper that the legislation will not affect the CGT treatment of genuine investments in funds made by managers on the same terms as third party investors, nor will it impact the treatment of performance-linked rewards paid to fund managers that are charged to tax as trading income.

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The rule change will hit where an individual fund manager is given a direct participation in the underlying vehicle, generally a partnership.

This sort of arrangement that allows the manager to share in the profits of the fund once an agreed level of performance has been reached. An example of such a performance linked interest is the ‘carried interest’ awarded to the managers of private equity funds.

Rules that dated back to 1987 allowed the sums received by the investment manager in respect of their carried interest to be charged to CGT, because the receipts are normally treated as proceeds from the disposal of chargeable assets.

While these rules allowed the gain to be charged at the full rate of CGT, the gain subject to tax was reduced.

Under the new rules the charge to CGT will relate to the full economic return arising to the fund manager, rather than the interest in the fund.