UK reforms carry tax proposals

As a result of successful industry lobbying efforts, the UK government has clarified that private equity executives disposing of their carried interest rights are not necessarily taxed on the full unrestricted value of the right, which would have ignored any vesting or other conditions tied to the carry.

Departing partners, for instance, often sell their unvested or partially vested carried interest rights back to the firm or to a new joiner.

Concerns arose earlier this summer that the 2015 Summer Finance Bill rules, as originally drafted, could have subjected managers disposing their carried interest rights to dry taxation on the full unvested value of that interest. Changes to the draft legislation have eliminated that concern.

The amendment is part of a number of complex and technical changes the UK government made to the Finance Bill, which is expected to come into law in the coming weeks, with many aspects taking retrospective effect.

The changes clarify the tax treatment of carried interest rights held indirectly in corporate vehicles or trusts. The amendments introduce rules that can tax such sums in the hands of the executive when he or she receives benefits or can control how such sums are used, among other tests.

The amendment also provides GPs a measure of protection from immediate tax on carried interest held in certain intermediate vehicles where the carry is escrowed or otherwise unavailable until conditions have been met. 

“Simply owning shares in a company that holds carried interest should not, of itself, be enough to fall within scope of the rules, but there are complex anti-avoidance rules to navigate,” said Proskauer tax partner Robert Gaut in an interview with pfm.

Gaut said that the industry is hoping for additional guidance from HMRC on a number of technical uncertainties remaining in the draft legislation, in particular around the new concept of deferred carried interest and the treatment of trusts.