Under the revised legislation which has now taken effect as part of the Finance Act and applies to sums arising on or after 6 April 2015, co-investment, and a more broadly drafted definition of “carried interest” are now excluded from the charge to income tax.

The new “disguised fee” legislation brings within the charge to income tax management fees received by individual investment managers, if:

  • the arrangements under which the management services are provided include at least one partnership and
  • the fee would not otherwise be subject to income tax. The new legislation will apply to such fees received by investment managers from both collective investment schemes (as defined under FSMA 2000) and investment trusts.

Now excluded from the income tax charge are:

  • repayments of investments made by individuals in the collective investment scheme (or investment trust)
  • arm’s length returns on such investments. An arm’s length return is defined as a return on an investment of the same kind as those made in the scheme/trust by external investors, that is “reasonably comparable” and on “reasonably comparable” terms (to external investor returns)
  • “carried interest”. Broadly, this now excludes from the income tax charge “profit-related” returns that are not guaranteed. This is no longer (as originally drafted) limited to returns due after a minimum 6% preferred return has been paid to investors.