Risk of rise in rate of tax on carried interest and review of the capital gains tax system
Risk to Carried Interest
The Chancellor has recently requested the UK Office of Tax Simplification to review the capital gains tax system and the interaction of how gains are taxed compared to other types of income.
This has caused speculation in the market that carried interest payments received by fund managers and private equity executives may be subject to a significant tax hike to be announced in the Autumn or next Spring budget. With a huge public borrowing of an estimated £322 billion because of COVID-19, it is thought that the Government could well raise taxes on carried interest payments to generate more revenue.
In return for managing a private equity fund and assisting in the making of investment decisions to maximise returns by the funds, fund managers (whether employed or self-employed) typically receive a share of the profits realised from the fund’s investments, known as “carried interest”. The carried interest typically entitles the fund managers to between 15% to 20% of the fund’s overall profits after return of capital and a preferred return to investors in the fund. This is in addition to any salary and bonus that a fund executive or profits that a self-employed fund manager receives.
Carried interest payments are currently taxed at a special capital gains tax rate of 28%, which, although higher than the normal capital gains tax rate of 20% (10% if entrepreneurs’ relief is available) is significantly lower than the income tax rate of 40% for higher rate taxpayers (for income between £50,000 to £150,000) and 45% for additional rate taxpayers (for income above £150,000).
Review of CGT
In response to the Chancellor’s request, the Office of Tax Simplification has, on 14 July, published an online survey and a call for evidence to seek views about capital gains tax. They want to hear directly from individuals and businesses, professional advisers and representative bodies about the aspects of capital gains tax that they consider particularly complex and also welcome suggestions for improvements. The call for evidence comes in two sections: the first section seeks high-level comments on the principles of capital gains tax by 10 August 2020, and the second section invites more detailed technical comments by 12 October 2020. Further details in this regard including details of how to participate in the survey can be obtained from https://www.gov.uk/government/consultations/ots-capital-gains-tax-review-call-for-evidence-and-survey.
MM&K will be participating in the OTS survey. It will be sending both high level comments and detailed technical suggestions. We will be keeping a close watch on the developments in this area and will report updates in our newsletter on a regular basis.
Our initial thoughts regarding the practical ways in which the Government may try and make changes to CGT can be found here.