Private equity executive with carried interest in a fund

I am a private equity executive with carried interest in a fund I manage. Is there a way to improve my tax position in respect of this carry, or is this prevented by the UK’s new tax rules aimed at private equity?

Even though the UK has tightened its tax treatment of carried interest and other interests in private equity funds, you should still normally be able to take certain steps to improve your tax exposure in respect of your carried interest; whether you take those steps before or after moving to the UK.

For example, if you are non-UK domiciled it may be possible to exclude your carried interest (and the sums arising from it) from UK inheritance tax (IHT) by arranging for it to be held in trust. For so long as assets remain in trust, they should be excluded from IHT in perpetuity; meaning it can be a useful vehicle for long-term estate and succession planning.

It should also be possible to reinvest the proceeds of the carry and roll up profits free from UK tax, even though the anti-avoidance rules may deem returns on the carry itself to arise to you for tax purposes. Steps can be taken to ensure you do not incur a “dry” tax charge on the carry (i.e. without receiving anything on which the tax arises), and that you can receive enough from the trust to pay the tax but without incurring a double tax charge.

Double taxation may also be a concern if you acquired the carry (or any other interest in the fund) at a point when you were tax resident elsewhere - in which case the other country may impose tax charges alongside the UK. Careful planning will be necessary to avoid this risk, ideally before you move to the UK; and also to avoid the risk of falling foul of the various pitfalls posed by the UK’s wide network of anti-avoidance rules.

For more information or advice, please contact Alex Tamosius, Senior Associate, in our Private Client team.

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