Key items for your agenda in 2025
Our standout items
Reform of UK tax treatment of carried interest
What’s happening?
The UK tax treatment of carried interest is being significantly reformed.
The current minimum tax rate for carried interest will be raised to 32% (from 28%) for the next tax year (6 April 2025 – 5 April 2026), with more fundamental changes for later years. From 6 April 2026, all carried interest (whatever its underlying source) will be taxed exclusively as trading income. Trading income is taxed at rates of up to 45% plus 2% NICs, but a discount mechanism will be applied to “qualifying” carried interest to give an effective tax rate (including NICs) of just over 34%.
To be “qualifying”, carried interest must not fall within the UK’s “income-based carried interest” (IBCI) rules – these rules, broadly, require the underlying fund to have a weighted average holding period for its assets of at least 40 months. In an important change, the IBCI rules will apply to all carry holders including employees (currently, only self-employed LLP members are in scope). The government is considering whether a minimum co-invest condition or a minimum hold period before carry pays out should be attached to “qualifying” status.
What does this mean for me?
At just over 34%, the UK will still have a competitive effective tax rate for carried interest, albeit narrowly the highest amongst rival mainstream European jurisdictions. In addition, the move to a trading income regime has the potential to give rise to difficult technical issues, especially for non-residents. It will therefore be important that the government carefully structures the new regime to make it straightforward to apply and ensures that any additional conditions for “qualifying” status (beyond the IBCI rules) can be met by normal commercial carried interest arrangements.
There may also be some winners under the new rules. Executives who currently pay over 34% on their carry returns may end up better off with the new flat rate of just over 34% from 6 April 2026. This could be relevant for credit, infrastructure and real estate strategies that generate significant interest or rental income.
For more detail please see our article.
There had been concerns that the new Labour government would tax all carried interest at full income tax rates of up to 45% (plus NICs), and so many in the private capital sector were relieved to see a rate of just over 34%. This keeps the UK in touch with (albeit at the top of) the European mainstream, but the optics of having a relatively high tax rate are not ideal. In addition, the move to a trading income regime and the possible introduction of further qualifying criteria, are likely to add significant complexity.
Elena Rowlands
Partner
Replacement of UK non-dom regime
What’s happening?
From 6 April 2025, the current (generous) tax regime for UK resident but non-domiciled individuals will be replaced by a residence-based regime. Under the replacement regime, new arrivals to the UK who have not been UK resident in the previous 10 years can elect not to pay UK tax on their foreign income and gains for their first 4 years of UK tax residency. In addition, inheritance tax will move from being based on domicile to being based on residence.
What does this mean for me?
Private capital businesses commonly have an internationally mobile workforce, and it is, therefore, likely that team members will be impacted by the replacement of the non-dom regime. Businesses who expect to have affected personnel may wish to consider in advance their position on relocation requests.
Other things to keep a close eye on
EU retail investment strategy
What’s happening?
The EU’s proposals for a retail investment strategy include enhanced obligations on AIFMs not to charge “undue costs”, with requirements for AIFMs to operate an effective pricing process and to reimburse the fund or investors for any undue costs charged.
See our briefing summarising some of the key original proposals.
So what?
The EU legislators are continuing to negotiate the specific requirements including, potentially, the concept of value for investors. Despite its name, not all of the proposals are limited to funds that include retail investors; they may also affect AIFMs managing funds that only include professional investors.
It is not yet clear when the new rules would start to apply but 2026 seems the most likely date – we will keep you posted.
New UK retail distribution rules
What’s happening?
Under a new retail disclosure framework, packaged retail investment and insurance-based products (commonly known as “PRIIPs”) are to be rebranded as “Consumer Composite Investments”. New rules will apply and the UK PRIIPs Regulation will be repealed. As an interim measure, the UK government has exempted UK-listed closed-ended investment companies from the UK PRIIPs Regulation and certain other disclosure requirements.
So what?
The legislation sets out the framework, including the definition of Consumer Composite Investments which largely reflects the current PRIIPs regime. The more granular obligations for persons carrying on activities in respect of Consumer Composite Investments will be in the FCA rules, which are currently being consulted on.
There will be some transitional provisions, but final rules are expected to be published during 2025 with an 18-month transition period proposed.
Developments in UK salaried members tax rules
What’s happening?
The UK’s salaried members rules, which can reclassify members of a UK LLP as employees (instead of self-employed partners) for tax purposes, have an impact on how almost all LLPs are run. This is because they require the position of each individual member to be addressed.
The rules have been a hot topic for some time. In the latest instalment of the BlueCrest litigation, on 17 January, the Court of Appeal overturned the position taken in both lower courts and gave a narrow interpretation of the “significant influence” exclusion from “salaried member” status. In addition, last year, controversially HMRC changed its guidance in relation to the another of the exclusions, reducing the circumstances when it considers it can apply. This provoked a strong response from industry.
Where are we now? A key question is whether BlueCrest will appeal to the Supreme Court. It would not be a surprise if it sought permission to do so, given the amounts at stake and the strong decisions at tribunal levels in favour of a wider interpretation of significant influence. In addition, HMRC is conducting an internal review of its change in guidance, and we expect to hear the outcome of that in the coming months. We will keep you posted on both these points.
What does this mean for me?
The LLP is a common business structure for private capital managers (and professional service firms).
An LLP member who is a “salaried member” is treated as an employee for tax purposes which means, among other things, that employer NICs are payable on their remuneration. The employer NICs rate is currently 13.8%, increasing to 15% from 6 April 2025 – the cost of the salaried member rules applying can, therefore, be substantial.
A key point that emerged from the Court of Appeal decision in BlueCrest is that influence can only fall within the significant influence exclusion if it derives from the legal rights and duties of members. As well as being a departure from the position taken by the lower tribunals, it also differs from HMRC’s published guidance which says that you look at how the LLP operates in practice (as well as to the written LLP agreement). Firms that rely on the significant influence exclusion should revisit their LLP agreements to ensure significant influence is properly embedded in the legal rights and duties of the members.
For more detail please see our briefing.
Given the importance of the salaried members tax rules to the LLP business model, the uncertainty around the scope of the rules has been unsatisfactory. The recent Court of Appeal decision in BlueCrest may not help on this front as we wait to see if it is appealed and taxpayers and HMRC work through the ramifications of the (for the time being at least) reduced scope of the significant influence exclusion.
Tom Margesson
Senior Associate
UK Reserved Investor Fund (Contractual Scheme) (RIF)
What’s happening?
The UK government has confirmed that it will introduce a new fund vehicle, the RIF. If the final rules mirror the draft legislation that was consulted on last year, the RIF is likely to be primarily of interest to investors in commercial real estate. Indeed, for the right investor base, it could be an onshore rival to the Jersey property unit trust (JPUT). It is expected that the RIF will be available to professional investors, as well as those who invest at least £1m.
So what?
As the RIF will be unauthorised, it should be flexible and easy to use. Our view is that this, combined with the generous UK tax treatment being proposed, should make it attractive for investors in UK real estate.
The government has indicated that the relevant legislation will be passed by 5 April 2025. This is likely to mean that the RIF will be available for the start of the new tax year (6 April 2025).
