Income-based carried interest rules
Income-based carried interest rules

The following Tax guidance note provides comprehensive and up to date legal information covering:

  • Income-based carried interest rules
  • Interaction between the rules on IBCI and DIMF
  • How do the IBCI rules work?
  • Calculating the average holding period
  • Simplification of average holding period rules
  • Direct lending funds
  • Conditionally exempt carried interest
  • Dovetailing with new rules on carried interest
  • Anti-avoidance
  • Avoidance of double taxation

The income-based carried interest (IBCI) rules form part of the legislation which governs the tax treatment of rewards received by fund managers. The IBCI rules attempt to ensure that only carried interest returns that arise from long-term investment activity can benefit from capital gains tax (CGT) treatment.

The IBCI rules were introduced in Finance Act 2016 (FA 2016) and followed the enactment of anti-avoidance legislation targeted at investment fund managers and known as the ‘disguised investment management fee’ (DIMF) rules.

This Practice Note explains:

  1. how the IBCI and DIMF rules fit together

  2. how the IBCI rules work

  3. how to calculate the average holding period

  4. when the average holding period may be modified

  5. how direct lending funds are treated

  6. when carried interest can be treated as conditionally exempt, and

  7. what happens when the IBCI rules do not apply

For a detailed analysis of the DIMF rules, see Practice Note: Disguised investment management fee rules and for more information on the taxation of carried interest generally, see Practice Note: Taxation of carried interest holders in a private equity fund

Interaction between the rules on IBCI and DIMF

The DIMF rules were enacted in Finance Act 2015 to target specific tax planning arrangements used by investment fund managers (particularly private equity fund managers). The planning arrangements broadly attempted to provide part of the management fee due