Policy paper

Investment managers: performance linked rewards

Published 9 December 2015

Who is likely to be affected

Investment managers in receipt of performance-linked rewards (often called carried interest) which they have previously treated as chargeable to Capital Gains Tax (CGT) where the underlying fund holds investments for an average period of less than 4 years.

General description of the measure

The measure introduces an objective, legislative test to determine whether carried interest should be taxed as capital gains or income. This will be determined by testing the average period for which the fund holds assets. All returns which are not subject to CGT will be chargeable to Income Tax and Class 4 National Insurance contributions (NICs) as trading profits.

Policy objective

This measure will ensure that a carried interest structure only attracts CGT treatment in relation to funds which carry on long-term investment activity.

Background to the measure

This measure follows a consultation on the performance linked rewards paid to asset managers that took place from 8 July to 30 September 2015. A summary of the responses to this consultation will be published on 9 December 2015.

Detailed proposal

Operative date

This measure will apply to sums of carried interest arising on or after 6 April 2016, whenever the arrangements giving rise to those sums were entered into.

Current law

Carried interest arises to investment managers as a performance-based reward for managing the funds of an investment vehicle, typically a partnership. Sums allocated to an individual in satisfaction of carried interest are treated, for tax purposes, as though the individual had carried out the transactions which gave rise to the sums. Where the fund partnership is investing rather than trading for tax purposes, those sums will be treated as capital gains or income by reference to case law.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to amend the disguised investment management fees legislation introduced at Chapter 5E of the Income Tax Act 2007 by section 21 of Finance Act 2015.

The measure will provide that, where an individual performs investment management services for a collective investment scheme, then any sum of carried interest arising from that fund will only be eligible for capital gains tax treatment if the fund holds investments, on average, for at least 4 years. Partial capital gains tax treatment will be available where the average holding period is between 3 and 4 years. Where the average hold period is below 3 years all sums of carried interest arising to the individual - however structured - will be charged to tax and NICs as trading profits.

This measure will not affect the taxation of performance-linked rewards which are already charged to income tax. This measure will not impact on co-investments made in the fund by fund managers or an arm’s length return on such a co-investment.

Summary of impacts

Exchequer impact (£m)

2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021

This measure is expected to increase annual receipts. The final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out at Budget 2016.

Economic impact

The measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure will have an impact on individuals in the investment management sector who currently receive a performance linked reward in respect of their activities which is charged to capital gains tax.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

This measure will affect individuals receiving carried interest from investment funds. These are likely to share protected characteristics with others of above average means, and equality groups represented in lower income groups are less likely to be affected.

Impact on business including civil society organisations

This measure will increase compliance burdens on investment management business who engage the services of individuals affected by the measure. On an annual basis this is likely to consist of compilation of information and data, and calculation of the average holding period of business’ funds, applicable to carried interest arising to individuals. For some there may be additional external tax advice sought.

There is likely to be a negligible one-off cost for businesses in familiarisation of the new legislation, and compilation of data on existing funds and investments.

Small and micro business assessment: the impact of this measure on small and micro businesses is not anticipated to differ from that on large businesses.

The estimated total additional burden on those businesses affected by the changes is set out below:

Estimated one-off impact on administrative burden (£m)

One-off impact	(£m)
Costs	negligible
Savings	-

Estimated ongoing impact on administrative burden (£m)

Ongoing average annual impact	(£m)
Costs	0.2-0.3
Savings	-
Net impact on annual administrative burden	+0.2-+0.3

Operational impact (£m) HM Revenue and Customs ((HMRC) or other)

The costs to HMRC of implementing this change are not expected to be significant.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through disclosures of new avoidance schemes seeking to circumvent the measure, and through communication with taxpayers and practitioners affected by the measure.

Further advice

If you have any questions about this change, please contact James Coward on Telephone: 03000 579560 or email: james.coward@hmrc.gsi.gov.uk, Richard Rogers on Telephone: 03000 585521 or email: richard.rogers@hmrc.gsi.gov.uk.