What happened: The UK Chancellor of the Exchequer, Rachel Reeves MP, announced reforms to the UK’s carried interest regime in her first Budget Statement to the House of Commons earlier today.
Why it matters: The rate carried interest will be taxed increases from 28% to 32% starting in April 2025.
HM Treasury is also consulting on broader reforms to the carried interest regime set to take effect April 2026. Early indications are that carried interest will be considered trading profits, making it subject to Income Tax and National Insurance Contributions instead of Capital Gains Tax. However, only 72.5% of “qualifying carried interest” would be taxable if conditions under consultation by HM Treasury are met, including a minimum:
- Co-investment requirement
- Time period between the award of the right to receive carry and its receipt
The revised carried interest rules will not replace existing tax rules, including the disguised investment management fee (DIMF) and income-based carried interest (IBCI) rules.
Also: Other taxation changes announced include:
- Employer National Insurance Contributions will increase from 13.8% to 15% from April 2025.
- Capital Gains Tax will be increased, with the lower rate rising from 10% to 18% and the higher rate from 20% to 24%.
- The ‘non-dom’ regime will be abolished in April 2025.
- VAT will be levied on private school fees from January 2025.
The tax changes are projected to increase the UK’s tax burden by £40 billion a year, raising it to 38% of GDP by 2027-28.
MFA on the issue: MFA has long advocated for tax policies that encourage long-term capital investments. We oppose discriminatory tax proposals that deter investment advisers from choosing the UK as the place to build their alternative asset management businesses. We responded to the preliminary HM Treasury Call for Evidence on carried interest this August and are reviewing today’s proposed HM Treasury Consultation (Chapter 4). We will work with members on an appropriate response ahead of the January 31, 2025, deadline.
Next steps: The Chancellor will deliver her annual Mansion House Dinner speech in the City of London on November 14. This event provides an opportunity to outline the Government’s priorities on financial services regulatory reform.
