New Labour Government's Initiative on Carried Interest Tax Reform
Following the election of the new Labour Government on July 5, 2024, HM Treasury published the “Open Call for Evidence” paper on July 29, 2024, regarding the tax treatment of carried interest. The aim is to engage with concerned parties and implement changes also considering their feedback.
During the announcements made by the Chancellor of the Exchequer on July 29, addressing the proposed changes impacting the UK tax system, the Chancellor also committed to addressing 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 rewards, carried interest is currently taxed at Capital Gains Tax (CGT) rates of 18% and 28%.
The Case for and Approach to Reform
The tax treatment of carried interest is a subject of considerable debate. The government believes the current tax regime does not appropriately reflect the economic characteristics of carried interest and the level of risk assumed by fund managers who receive it. As a result, the government will be taking decisive action.
Throughout this program of work, the government will seek to protect the UK’s position as a world-leading asset management hub, recognizing that the sector channels vital investment across the UK and plays an important role in the government’s mission to boost economic growth.
Despite this commitment, we are taking action. In line with that commitment and the significant nature of this change, we are launching a call for evidence to gather insights and input from stakeholders.
Gathering Evidence
As part of this call for evidence, the government intends to engage extensively with all interested parties. Over the coming weeks, officials will meet with a range of expert stakeholders across industry, relevant professions, academia, and other areas. We also encourage written representations to be submitted by August 30. Our broad and inclusive approach aims to achieve policy outcomes that are fair, transparent, and justified.
While we welcome all relevant input, the government is particularly interested in feedback on the following areas:
How can the tax treatment of carried interest most appropriately reflect its economic characteristics? The government notes that carried interest is received under various circumstances, and the reward's characteristics will not be the same in all cases.
What are the different structures and market practices with respect to carried interest? The government is particularly interested in understanding how these differences should be considered as part of its reforms.
Are there lessons that can be learned from approaches taken in other countries? Many countries have specific regimes for taxing carried interest, but their details and conditions for access vary.
Throughout this call for evidence and any subsequent policy decisions, the government’s work will be guided by the principle that the tax system should be fair, efficient, and minimise distortions. We place a premium on the certainty and stability of outcomes, recognizing the role tax can play in boosting growth
How to Engage
The government welcomes written representations and is keen to meet with stakeholders to discuss the issues. Submissions should be provided by no later than August 30, and meetings can be requested at any point before then, with early engagement encouraged. Following this engagement, stakeholders should expect a further announcement at the Budget on October 30.
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