Key points for investment funds from the 2015 Summer Budget

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

1. Carried interest taxation - base cost shift 

Sums arising to investment fund managers by way of carried interest are from yesterday subject to capital gains tax on the full amounts that such managers receive, with only limited deductions being permitted for sums actually given in consideration for acquiring the right to that carried interest. This will apply regardless of when the carried interest arrangements were entered into. Historically, managers have benefitted from greater deductions as a result of ‘base cost shift’ from a fund’s investors. The measure will not impact co-invest arrangements.

2. Performance rewards for fund managers - consultation 

The Government has also launched a consultation to better understand the activities of collective investment schemes in order to determine when performance returns should be taxed as capital returns. It is not anticipated that the capital treatment of true carried interest in investment funds will change as a result of the consultation. Nor will this impact co-invest arrangements.

3. Limited partnership reform - consultation 

The Government will shortly publish a new consultation on reforming UK limited partnership law. As with previous, largely failed attempts at reform, the aim will be to enable private equity and venture capital style investment funds to use limited partnerships more effectively. There are several possible changes and clarifications that the industry would welcome. Amongst these is the inclusion of a ‘white-list’ of ‘safe-harbour’ activities that limited partners could perform without ‘taking part in the management’ of a limited partnership fund, thereby losing their limited liability.

4. PAIFs and CoACSs – re-statement of intent 

The Government signalled that it is (still) planning to encourage the establishment of property authorised investment funds (PAIFs) and co-ownership authorised contractual schemes (CoACSs) by changing the applicable SDLT rules (i.e. continue to watch this space).

Please contact either of us or your usual Nabarro contact if you would like to discuss the implications of these changes further.