This Practice Note provides an overview of what hedge funds are and looks at some of their key features. It also provides some commentary on the UK hedge fund industry. What are hedge funds? There is no specific definition of the term ‘hedge fund’. Rather, the label ‘hedge fund’ represents a sort of catch-all for funds that don't sit neatly into any other category of collective investment (eg authorised investment funds or private equity funds). There are, however, a number of characteristics that are typically shared by so-called hedge funds. If present, these would typically cause a fund to be classified as a ‘hedge fund’ as opposed to any other sort of investment fund. In practice, most hedge funds will have all, or most, of the following characteristics: • open-ended collective investment vehicle • seeking a total return for investors • generally opportunistic • taking ‘short’ positions • maximising leverage (ie borrowing) • fee structures comprising both a fixed management fee and a variable annual performance fee Each

FORTHCOMING CHANGE relating to the tax treatment of carried interest: Following a call for evidence on the tax treatment of carried interest that ran over summer 2024, at Autumn Budget 2024 the government announced that it would introduce a revised tax regime for carried interest from 6 April 2026 that would sit within the income tax framework, subject to special rules to take account of the unique characteristics of the reward. A consultation on potential new qualifying conditions for access into the new regime followed, with a government response to this being issued in June 2025. Draft legislation for the new tax regime for carried interest was published on 21 July 2025, for inclusion in Finance Bill 2026. The new rules will have effect for carried interest arising on or after 6 April 2026. All this was confirmed at the Budget on 26 November 2025, where it was also noted that some changes had been made to the draft legislation to reflect stakeholder feedback. Pending the

This Practice Note considers the application process for a company seeking HMRC approval as an investment trust for tax purposes. For: • what investment trusts are and the eligibility conditions and other requirements for a company to be treated as an investment trust for tax purposes, see Practice Note: Tax and investment trusts—what are investment trusts? • the tax treatment of approved investment trusts and their investors, see Practice Note: Tax and investment trusts—tax treatment of the fund and its investors • the circumstances in which HMRC approval may be withdrawn and the associated consequences, see Practice Note: Tax and investment trusts—breaches of eligibility conditions and ongoing requirements Contents of the application Basic contents All applications seeking approval for investment trust status must contain: • the date of the first day of the first accounting period for which approval is sought • a statement that the company meets, or is expected to meet, for that first accounting period: ◦ the eligibility conditions contained in the Corporation Tax Act 2010, and ◦ the

In order to obtain, and maintain, status as an approved investment trust for UK tax purposes, a company must satisfy certain eligibility conditions contained in the Corporation Tax Act 2010 (CTA 2010), and meet several ongoing requirements imposed by the Investment Trust (Approved Companies) Tax Regulations, SI 2011/2999 (Investment Trust Regulations). For more on these eligibility conditions and requirements, see Practice Note: Tax and investment trusts—what are investment trusts? This Practice Note looks at what happens when an approved investment trust breaches any of those eligibility conditions or fails to meet any of those ongoing requirements. The Practice Note also covers what happens when an approved investment trust files on the basis that it is not an approved investment trust for tax purposes. For how a company applies for approval as an investment trust, see Practice Note: Tax and investment trusts—applying for HMRC approval. For the tax treatment of approved investment trusts and their investors, see Practice Note: Tax and investment trusts—tax treatment of the fund and its

Investments trusts are often structured as companies without a fixed life. This means that investors are only able to realise their investment through selling their shares on the relevant stock exchange. The price at which those shares trade in the market may not fully reflect the net asset value of the investment trust’s underlying investments—often, shares trade at a discount to net asset value. To enable investors to realise the full net asset value of their investment, investment trusts do sometimes have a fixed life. This means that the company will be liquidated/wound up at a pre-determined date. Alternatively, it is possibly for investment trusts to be liquidated/wound up in response to demand from investors and the realised assets distributed to investors even though this was not envisaged at the time the investment trust was established. Where it is proposed to liquidate/wind up an investment trust, there is often, also, a reconstruction of the investment trust, meaning that investors are offered the opportunity to roll-over their investment into a new investment

An investment trust is a pooled investment vehicle in the form of a listed UK tax resident company. Despite the name, therefore, it is not a trust in the legal sense. Investment trusts enjoy exemption from tax on chargeable gains if they are approved by HMRC. For more on what investment trusts are and the eligibility conditions and ongoing requirements they must satisfy, see Practice Note: Tax and investment trusts—what are investment trusts? This Practice Note considers the special rules for the taxation of approved investment trusts relating to: • tax on chargeable gains • tax on income—in particular, the treatment of: ◦ distributions received ◦ trading vs investment transactions ◦ loan relationships and derivative contracts ◦ interests held in non-reporting offshore funds, and ◦ management expenses • the elective streaming regime pursuant to which an approved investment trust may designate a distribution it makes to investors as interest • VAT All references in this Practice

An investment trust is a pooled investment vehicle in the form of a listed UK tax resident public limited company. Despite the name, therefore, in legal terms an investment trust is a company, and not a trust. The terminology dates back to a time when such vehicles were constituted as trusts, but all such vehicles consequently converted to limited companies and are therefore no longer trusts in any legal sense. Where an investment trust is approved by HMRC, it enjoys certain UK tax benefits. This Practice Note considers the eligibility conditions that must be satisfied for a fund to be approved as an investment trust for UK tax purposes. It also looks at the ongoing requirements that must be met in each accounting period for which it has been approved. For information on: • the investment trust HMRC approval process, see Practice Note: Tax and investment trusts—applying for HMRC approval • the tax treatment of approved investment trusts and their investors, see Practice Note: Tax and investment trusts—tax treatment

The acquisition of a business by way of a management buyout (often referred to as an ‘MBO’) involves the acquisition of a business by its existing management team (or some members of that team), typically with the assistance of private equity-backed finance. The private equity investor receives a stake in the business (typically a majority stake) and the incumbent management remains in place post-acquisition. MBOs are one of the most commonly encountered private equity-backed transactions as they are seen as a relatively low-risk option for investors. The success of an MBO will usually be heavily dependent on the performance of the management team. The private equity investor backing the MBO will therefore want to incentivise these individuals and ensure that their interests are aligned with those of the private equity investor. This can be achieved where members of the management team invest in the target business via subscribing for shares in the top company of the newly formed acquisition group (Newco 1). This ensures that the management team has an added incentive (over and above any salary)

This Practice Note considers some example tax scenarios that could arise when members of a UK management team acquire shares in Newco 1 as part of a private equity-backed management buyout (MBO). It should be read in conjunction with Practice Note: Tax and management buyouts—management shareholdings. For what MBOs are, and how they are typically structured and financed, see Practice Note: Tax and management buyouts—what is a management buyout? The examples below are highly simplified calculations. They are designed solely to illustrate the potential differences between the various scenarios that may arise. As such, they should only be used as a tool to aid an understanding of the interaction between the different tax charges that can apply in respect of management shares, and the relevance of the various mitigation opportunities available. Note that the examples concern UK tax only. They do not take into account any tax deductions that may be available (such as disposal costs) and it is assumed that no anti-avoidance provisions apply. The examples consider: • the income tax charge on general

This Practice Note examines the tax issues arising for the UK management team in a private equity-backed management buyout (MBO) that are associated specifically with performance ratchets. Performance ratchets are a mechanism used by private equity firms investing in MBOs to incentivise the management team and ensure that their interests are aligned with those of the private equity firm. The success of an MBO will usually be heavily dependent on the management team. These individuals can be incentivised, and their interests so aligned, where they subscribe for shares in the top company of the acquisition group (Newco 1) as this gives the management team a stake in the proceeds of the future private equity exit (ie on top of any salary). Performance ratchets offer management an opportunity to increase the value of their equity shareholding further where certain performance targets are met. This Practice Note looks at the tax issues arising specifically in connection with performance ratchets. For the broader tax considerations associated with management shares held in Newco 1, see Practice Note: Tax and management

The success of a management buyout (commonly referred to as an ‘MBO’) will usually be heavily dependent on the performance of the management team running the business. The private equity investor backing the MBO will therefore want to incentivise the management team and ensure that management interests are aligned with those of the private equity investor. This can be achieved where management invest in the target business by subscribing for shares in the top company of the acquisition group (Newco 1). Investment in Newco 1 equity will mean that members of the management team have an added incentive (over and above any salary they may receive) to make the investment succeed because they will, through that equity holding, directly participate in the proceeds of a future exit. Often management are also offered an opportunity to increase the value of this equity shareholding through the means of a performance ratchet. For more on the role of the private equity investor and management team in an MBO, and how MBOs are typically structured

The acquisition of a business by way of a management buyout (often referred to as an ‘MBO’) is one of the most commonly encountered private equity-backed transactions. This Practice Note aims to provide tax lawyers with some basic background information about MBOs, by answering the following questions: • what are MBOs? • how are MBOs typically structured? • how are MBOs typically financed? • what transactional steps are involved in an MBO? • what are the options for private equity exit? For more detailed information on the tax issues involved in an MBO, see Practice Notes: • Tax and management buyouts—management shareholdings • Tax and management buyouts—performance ratchets • Tax and management buyouts—management shares: illustrative examples • Tax and management buyouts—tax reliefs available to management • Tax and buyouts—tax issues for the acquisition group • Tax and buyouts—deductibility and VAT recovery of acquisition group deal costs For non-tax specific coverage of buyouts more generally, see Practice Note: Buyouts. What are MBOs? In a nutshell, ‘MBO’ describes a transaction where