Summer Budget 2015: Consultation on taxation of payments to Investment Managers

A consultation regarding “Taxation of performance linked rewards paid to asset managers” has been announced.

Investment managers are typically rewarded in a number of ways, two of the most significant being:

  • the opportunity to effectively invest in the assets that they are managing on behalf of their client or employer investment funds (known as “carried interest”), the returns on which are treated as capital; and
  • performance based fees, which are treated as a reward for services and taxed as trading income.

The consultation is a response to the actions taken by some investment managers to attempt to reclassify their trading activities as investment activity. This would lead to the performance based fees being classified as capital rather than income and being taxable under the CGT rules rather than the income tax rules.

The consultation follows on from the introduction of legislation on “disguised management fees” in Finance Act 2015 and proposes to set out tests in legislation to clarify which performance fees are capital and which are taxable under the income tax rules.

The consultation document outlines alternative potential statutory regimes that could be adopted and seeks respondents’ views on the relative merits of the two proposals.

Responses are invited and the consultation will close on 30 September 2015.