Draft UK Income-based Carried Interest Legislation Published

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Proposed new UK rules will tax carried interest in certain funds as income, with only specified funds entitled to capital gains treatment -

The UK government published draft legislation on 9 December 2015 amending the tax treatment of carried interest. The final legislation is expected to be enacted in a substantially similar form to the published draft, although further changes are possible. The new rules restrict the ability of UK tax-resident individuals to treat carried interest as a capital gain (the headline rate of tax on capital gains is 28%, whereas an individual’s income can be taxed at a rate of up to 45%). All returns realised on or after 6 April 2016 will fall within the scope of the new rules, even if the underlying arrangements were established before that date. These changes follow the Disguised Investment Management Fee rules introduced on 6 April 2015 and the rules that impact “base cost shift” that apply from 8 July 2015, and form part of the UK government’s ongoing efforts to ensure that rewards which asset managers receive are subject to UK income tax, except if those rewards are a return in respect of an genuine investment made by the asset manager.

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