Summer Budget 2015: Carried interest – changes to CGT base cost calculation

Employees of fund managers and private equity companies often participate in structures, typically partnerships, that allow them to benefit from some of the growth in the value of the assets that they are managing. The return that participants in these structures receive, generally known as “carried interest”, is taxable under the CGT rules.

The treatment of the participants in the carried interest arrangements is the same as for any other member of a partnership, and follows the scheme set out in Statement of Practice D12 (SPD12).  The combined effect of SPD12 and various planning techniques can mean that book transactions undertaken by the partnership can boost an individual’s base cost of the carried interest for CGT purposes, so that it is higher than the actual amounts invested by that person.

This has the effect that the individual will pay less CGT than they would otherwise.

The proposed changes take effect immediately and are narrowly targeted at persons who provide investment management services for a collective investment scheme.  The effect of the rule change will be to treat any amounts received from a carried interest partnership structure as being proceeds that are chargeable to CGT and to limit participants’ base costs to amounts that they have actually paid to acquire their interests in the carried interest vehicle.

At this stage, the impact of these changes is difficult to gauge; for participants in carried interest partnerships, the change is likely to increase the amount of tax that they will pay on their profits; for the industry as a whole the changes may result in a move to adopt alternatives to partnership structures for their carried interest vehicles.