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HMRC clamps down on fund manager performance fees

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The Government is clamping down on individual fund managers looking to mitigate the tax applied to their performance fees.

HMRC says it is aware of fund managers claiming their funds are “investing”, rather than “trading”, with a view to linking their performance fees to the performance of the underlying funds (or “carried interest”) which is then subject to capital gains tax rather than income tax.

They are able to do this because the performance-linked interest in the fund entitles the managers to a proportion of the gains from the fund’s investment activity, rather than a share of its trading profit.

The HMRC consultation says: “Some fund managers see scope to push the boundaries and try to obtain favourable tax treatment.”

Whether performance fees are charged as income or capital can have significant consequences, the Government says. Higher rate taxpayers in a partnership will be charged 45 per cent income tax with 2 per cent national insurance for performance rewards, while higher rate taxpayers subject to capital gains tax would only be charged 28 per cent.

The Government has launched a consultation to determine whether fund managers rewards should be taxed as income.

It has proposed a default rule that all performance-linked rewards for individual investment managers will be charged as income, with the exception of funds undertaking “specified activities,” such as some private equity vehicles and performance–related rewards which have historically been subject to capital gains tax.

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