So has the loophole been closed? Not really
With two important exceptions, discussed below, the main effect will be to raise the effective tax rate on carried interest from 28% before the election (currently 32%) to 34.1% from April 2026. That tax will now be income tax and national insurance rather than capital gains tax, but this will make little practical difference. Funds which hold investments short term will see their carry taxed at full income tax/ NI rates (47%) but then they were anyway under the Disguised Investment Manager Fee rules.
The dividing line between what is taxed at higher and lower rates looks to remain largely unchanged (although with a number of differences at the level of the detail). There was a wide expectation that managers would be required to co-invest to access the lower rates but this does not seem to have come to anything.
The more important changes are to end the employment related securities (ERS) exemption and to change the rules around territoriality. The current interaction between the ERS rules and the carried interest rules effectively exempted more junior managers from the carried interest regime and allowed a fairly generous access to capital treatment. This has seemingly gone, meaning that more managers will be subject to the rules than ever before.
The rules around territoriality effectively impose a residency requirement for carried interest that is entirely distinct to the UK's existing residency rules, making an already over complex regime even more complicated. At its simplest managers, who work in the UK for at least 60 days a year will be subject to UK tax regardless of their wider residency, although the interaction with other tax rules inevitably makes that more complex in practice.
So, rates are up and more people will be subject to them. Private equity will undoubtedly be contributing more to the Treasury than they would otherwise. But special treatment for carried interest remains and the demand for carried interest structures is unlikely to be dimmed. The "loophole" has been tightened but still very much exists, to the relief of many in the industry.
If you would like more information on how these proposed changes could impact you or your business or would like advice on structuring a carried interest vehicle please speak to Tom Rank or Ravi Longia.
