Q&As

What is the tax treatment for a situation where, due to poor performance of future deals within a fund, there is a clawback of the carried interest paid (and taxed) previously in the UK?

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Published on LexisPSL on 27/06/2019

The following Tax Q&A provides comprehensive and up to date legal information covering:

  • What is the tax treatment for a situation where, due to poor performance of future deals within a fund, there is a clawback of the carried interest paid (and taxed) previously in the UK?

This Q&A assumes that the client is not treated as an employee for UK tax purposes. It also assumes that the client is a UK-resident and UK-domiciled individual. Lastly, it assumes that the US-based investment vehicle would be respected as a partnership for UK tax purposes. These assumptions will need to be carefully tested against the facts. In this respect, the following Practice Notes may be helpful: Employment status—why it matters and Entity classification case law and HMRC's interpretation.

If those assumptions are correct, then it is possible that carried interest distributions to the client will be taxed as capital gains (at a special rate of 28%), and not at the higher rates of income tax which apply to investment income such as dividends and interest. This will depend on how those distributions trace through to the underlying assets of the US-based investment vehicle. In particular, to what extent is the client being allocated a share of underlying assets which will be regarded as capital assets for UK capital gains tax

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