Following the introduction of various complex new rules on the UK taxation of carried interest over the last 18 months (see here and here for previous commentary), the UK fund management industry has been keenly awaiting updated guidance from HM Revenue & Customs ("HMRC") on its proposed interpretation of the relevant provisions. A draft has now been circulated by HMRC to interested advisers, and comments from stakeholders invited by 13th January.

The guidance is described as being an early draft, but we understand that on core issues it is unlikely to change. It covers the new Disguised Investment Management Fee ("DIMF") rules and the new capital gains tax regime for carried interest, but unfortunately does not yet cover the Income Based Carried Interest ("IBCI") rules.


Loans to fund co-investment are discussed in the context of the exception to the carry regime available in respect of so-called "arm's length co-investment". HMRC's current view is that leverage provided in a way which effectively gives individuals a deduction for interest costs (for example, through preferred partnership interests in a co-investment vehicle) will prohibit a co-investment from falling within the exception. Many leveraged co-investment feeders may be affected on this basis.

There is also guidance for UK resident but non-UK domiciled individuals who work partly outside the UK and who may therefore be able, to that extent, to claim the remittance basis on carry proceeds (keeping those proceeds outside of the UK tax net). In determining the extent to which work is undertaken outside of the UK, it is clear that the significance of the particular duties being performed is just as important as the time taken. HMRC warn taxpayers that they will be sceptical about weight being attributed to non-UK days spent in low tax jurisdictions where funds are domiciled. There is comfort however for non-UK domiciled executives who habitually travel outside of the UK to source and close deals, or to raise funds, that they may be able to claim that a high proportion of their carry is not taxable in the UK. There is also comfort that the remittance basis rules should not automatically apply so as to treat carry proceeds as "mixed funds", which would generally be an unfavourable outcome, provided remittance-basis eligible proceeds are received by an executive into a separate bank account.

Less positively, HMRC make it clear that although the impact of the rules is on the face of it confined to individuals providing "investment management services", they currently intend to interpret that term very widely, and will always seek to argue that an individual receiving carried interest is affected whatever their role in the relevant business.