With effect from 6 April 2016, draft FB 2016 legislation will determine when “carried interest”3 is “income-based carried interest” and therefore subject to income tax and national insurance.

Broadly, carried interest will be:

  • (fully) subject to income tax and national insurance if the average length of time investments are held by the collective investment scheme (the “average holding period”) is less than three years
  • partially subject to income tax and national insurance (and partially subject to capital gains tax) if the average holding period is between three and four years
  • (fully) subject to capital gains tax if the average holding period is four years or more.

This new legislation is not intended to affect co-investments made in the fund by fund managers, nor an arm’s length return on those co-investments.