Carried interest taxation: the impact of the draft Finance Bill 2016

Posted by: Robert Field and Simon Ward | Date posted : 18/12/2015

The 2016 Draft Finance Bill has shown that the government will be looking to implement a more radical change to how carried interest will be taxed than first anticipated.

Historically a manager's carried interest (carry) has been taxed in the same way as the underlying investments. Now, funds will need to hold investments for four or more years for UK fund managers to qualify for full capital gains tax treatment on payments of carry. If held for under four years some or all of the carry will be taxed as income.

Currently, the income tax rate for high earners (over £150,000 p.a.) is 45% plus 2% National Insurance whereas the applicable capital gains tax rate is 28% - a meaningful 19% difference. The change was first announced in the Summer Budget. The news was then confirmed by the recent Autumn Statement which revealed the outcome of the consultation process. A link to HMRC's Consultation Documents can be found here. There will be a final consultation period before the change comes into effect on 6 April 2016.

The results of the initial consultation were released on 9 December 2015 by HMRC entitled, 'Taxation of performance linked rewards paid to asset managers'. Whether the lobbying efforts of the BVCA and others, to reduce the period from four to three years to 'better reflect the impact the economic cycle has on industrial activity', will bear any fruit is yet to be seen.

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If you require further information on anything covered in this briefing please contact Robert Field (; 020 3375 7574), Simon Ward (; 020 3375 7242) or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Tax page on our website.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2015