With more than £6trillion of investments managed by investment managers in the UK, the nation is one of the world’s leading investment centres. Investment management is very much an international business, with private equity firms establishing operations in multiple jurisdictions with ever more complex tax rules. With this in mind, it’s vital to maintain the UK’s competitiveness in order to attract and retain multi-national funds here.
There has been much speculation regarding the competiveness of the UK tax regime in respect of carried interest (the profit a private investment manager gets from running the investment fund) since the change of rules in July 2015, and the consultation around the taxation of performance-linked rewards paid to asset managers.
These new rules look to ensure that individuals will be taxed on their true economic gain when they receive a sum chargeable to capital gains tax which is linked to the successful performance of the fund, and that previously available planning tools designed to ensure they were taxed on a lower figure are no longer effective. As part of the consultation earlier this year - the results of which were released this month - respondents were asked to give their opinions on alternative methods of identifying which performance linked interest should give rise to capital gains, rather than income. Both measures are designed to combat what is seen as abusive tax planning. Many expressed concerns that further regulation would put an additional burden on fund managers, and could have a detrimental impact on the UK’s status as a leading financial centre.
But how valid are these concerns?
Other jurisdictions have complicated tax rules governing carried interest too, and these may be no more attractive than the UK’s capital gains tax rate. In the US for example, the rules were also changed in June 2015 to ensure that in most cases carried interest is taxed as general income resulting in a potential tax charge of up to almost 40 per cent, rather than the more favourable rate on long term gains. Some European countries still have favourable regimes but there is pressure for reform.
So whatever the outcome, it still remains to be seen what the true impact will be for the UK’s position as a leading investment centre.