UK finance bill confirms safety of carry

More details about the types of performance awards exempt from a tax clampdown on ‘disguised management fees’ were released in the UK’s final draft finance bill. 

Following extensive lobbying from the British private equity industry, the UK government carved out more exemptions to the types of award payments caught by a tax clampdown on “disguised management fees” in its finance bill published on Tuesday.

Last year, the UK Chancellor of the Exchequer George Osborne caught the industry by surprise when he vowed to stop GPs “from disguising guaranteed fee income as capital gains,” leading private fund professionals to worry the initiative would catch carried interest payments.

The original proposals narrowly defined carry as sums paid after a preferred return of 6 percent to investors, which could have proven problematic for venture capital funds and other types of GPs. The finance bill expands the definition to remove the hurdle requirement and carried interests that are based on Net Asset Value (popular with certain types of infrastructure funds).

“While there are still some issues with the new rules, the changes from the original proposals are as much as the industry could reasonably have hoped for,” said Damien Crossley, a tax partner at UK law firm Macfarlanes. 

Initial relief came last week, when the UK budget reaffirmed “sums linked to performance, often described as ‘carried interest,’ nor returns which are exclusively from investments by partners” would not be part of new legislation taking effect on April 6. The legislation is designed to prevent GPs from rolling annual management fees into performance fees, thus allowing a more favorable capital gains tax on the funds converted.

More guidance on the new rules is expected from UK tax authority HMRC next week.