Disguised investment management fee rules
Produced in partnership with Emily Clark of Travers Smith
Disguised investment management fee rules

The following Tax guidance note Produced in partnership with Emily Clark of Travers Smith provides comprehensive and up to date legal information covering:

  • Disguised investment management fee rules
  • Taxation of management fees (disregarding the DIMF rules)
  • The DIMF rules
  • Details of the DIMF legislation
  • Investment scheme
  • Disguised fee
  • Taxation of disguised fees
  • Exclusions
  • Anti-avoidance
  • Avoidance of double taxation

This Practice Note describes the tax code applicable to fund managers—the disguised investment management fee (DIMF) rules. In particular, it highlights:

  1. how management fees are taxed on ordinary principles, disregarding the impact of the DIMF rules

  2. the mischief which the DIMF rules seek to negate

  3. what constitutes a disguised fee

  4. when amounts arising to persons other than the individual fund manager might be deemed to arise to the manager, and

  5. the exclusions for carried interest and co-invest

This Practice Note refers to concepts such as the general partner's priority profit share (PPS). For details on the role of the general partner and how its PPS is calculated and paid, see Practice Note: What is the role and tax treatment of the general partner in a PE fund?

Taxation of management fees (disregarding the DIMF rules)

Subject to the DIMF rules (see below), the taxation of the management fee will vary depending on the structure of the manager.

Where the manager is a UK company, the manager will pay corporation tax on the profits generated by the management fee. Salary and bonus payments made to the individual fund managers employed by the manager entity will also be subject to income tax and National Insurance contributions (NICs).

Where the manager is a limited liability partnership (LLP) and so transparent for UK tax purposes, no tax arises at the level of the LLP itself. Instead, the members of the manager will be subject to tax on the proportion of the LLP's profits allocated to them. In the case of individual fund managers, their share of the LLP's profits will be taxed as trading income on a