Call for evidence outcome

The tax treatment of carried interest – A call for evidence

Updated 30 October 2024

Background

1. The government is committed to ensuring fairness in the tax system. For that reason, we are taking forward reforms in a range of areas.

2. The government will remove the outdated concept of domicile status from the tax system. Instead, we will implement a new residence-based regime which is internationally competitive and focused on attracting the best talent and investment to the UK. We will also close loopholes by ending the use of offshore trusts to avoid inheritance tax, so that everyone who makes their home in the UK pays taxes here. In addition, the government is committed to tackling the tax gap, ensuring more of the tax revenues that are owed are correctly paid.

3. Alongside these important changes, on 29 July the Chancellor of the Exchequer also announced a commitment to take action in respect of the ‘carried interest’ loophole. Carried interest is a form of performance-related reward received by fund managers, primarily within the private equity industry. Unlike other such rewards, carried interest can currently be taxed at Capital Gains Tax (CGT) rates of 18% and 28%.

The case for and approach to reform

4. While the tax treatment of carried interest is the subject of considerable debate, the government believes that the current tax regime does not appropriately reflect the economic characteristics of carried interest and the level of risk assumed by fund managers in receipt of it. As a result, the government will be taking decisive action.

5. Throughout this programme of work, as elsewhere, the government will seek to protect the UK’s position as a world-leading asset management hub, recognising that the sector channels vital investment across the UK, and will play an important role in this government’s mission to boost economic growth.

6. We are nonetheless committed to taking action and, in line with that commitment and the fact that this will be an impactful change, we are launching a call for evidence in order to gather insights and input from stakeholders.

Gathering evidence

7. As part of this call for evidence, the government intends to engage extensively with all interested parties. Over the coming weeks, officials will be meeting with a range of expert stakeholders across industry, other relevant professions, academia and elsewhere. In addition, we encourage written representations to be submitted by 30 August. Our broad and inclusive approach will seek policy outcomes that are fair, transparent and justified.

8. While we welcome all relevant input, the government would be particularly interested in feedback on the following areas:

• Question 1: How can the tax treatment of carried interest most appropriately reflect its economic characteristics? The government notes that there are a range of circumstances in which carried interest is received, and that the characteristics of the reward will not be the same in all cases.

• Question 2: What are the different structures and market practices with respect to carried interest? The government is particularly interested to understand how these differences should be taken into account as part of its reforms.

• Question 3: Are there lessons that can be learned from approaches taken in other countries? While many other countries have specific regimes for the taxation of carried interest, their detail and conditions for access vary.

9. Throughout this call for evidence – and in any decisions taken on policy design thereafter – the government’s work will be guided by the principle that the tax system should be fair, efficient and should minimise distortions. Moreover, we place a premium on certainty and stability of outcomes, as well as recognising the role tax can play in boosting growth.

How to engage

10. The government both welcomes written representations and is keen to meet with stakeholders to discuss the issues in play. Submissions should be provided by no later than 30 August, and meetings can be requested at any point before then – with early engagement welcome. Following this engagement, stakeholders should expect a further announcement at the Budget on 30 October.

11. If you would like to get in touch, please send an email to carriedinterest@hmtreasury.gov.uk. We look forward to hearing from you.