B5.646A Investment managers—treatment of carried interest other than income-based carried interest
The reward paid to many investment fund managers comprises two elements — a management fee and a performance fee. For some managers, the performance linked reward is not structured as a fee. Instead, the individual managers are given a direct participation in the underlying vehicle, generally a partnership. As a result, the manager shares in the profits of the fund once an agreed level of performance has been reached. Carried interest awarded to the managers of private equity funds is an example of such a performance linked interest. Following the introduction of legislation1 to ensure that the management fees received are charged to income tax (see B5.646), further legislation2 was introduced with effect broadly from 8 July 2015 (but see footnote 2) to ensure that carried interest is charged to capital gains tax in full. However, in relation to carried interest arising on or after 6 April 2016, income-based carried interest still forms part of the management fee chargeable to income tax (see B5.646). 'Carried interest' and 'income-based carried interest' have the same meaning as outlined in B5.6463.
A summary of the changes to the treatment of carried interest gains can be found in 'Changing outlook' by Marie Barber in Taxation, 28 November 2019, 16.
Background to the legislation
A statement issued by the British Venture Capital Association (BVCA) in 19874 set out how carried interest was to be treated for tax purposes under law in force at that time. In
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