2024 tax outlook for Investment Fund Managers
Alison Conley · January 26th 2024 · read
With the new year in full flow, Investment Fund Managers face a number of tax changes that could significantly impact their operations and tax positions during 2024. Investment fund managers need to stay abreast of these evolving requirements and proactively implement strategies in response to the changing landscape.
Planning for a Possible Change of Government
Whilst changes have been made to the carried interest rules under the current Government, there is likely to be a wholesale review should a Labour Government be elected later in the year. Official Labour Party documents refer to ‘closing tax loopholes for private equity fund managers’ and the Shadow Chancellor has stated that ‘private equity bosses say that their income is capital gains…we would close that loophole’.
Removing capital gains tax status from carried interest would increase the rate of tax payable from 28% to possibly 45% (plus NICs), if carry distributions are treated as income. In light of the potential changes to the UK tax treatment of carried interest, it is important for fund managers to take proactive steps to mitigate their tax risk including:
- Reviewing the impact of any changes by modelling the potential difference in tax liability; and
- Considering alternative structures for their investments.
We currently do not know how the abolition of carried interest would be implemented or whether transitional rules would apply but undoubtedly the removal of the current rules will have a significant impact on how funds are structured.
The Labour Party have been vocal in their opposition to the perceived tax advantages of having non-domiciled status whilst being UK resident. At a high level, fund managers taxed on a remittance basis can exclude foreign source income and gains from UK tax, provided that the funds are not remitted to the UK. Consequently, the reform or scrapping of the existing rules would adversely impact non-domiciled fund managers residing in the UK and who receive significant foreign sourced income via an offshore structure which is subsequently not remitted to the UK.
Whether income has a foreign source will depend on the facts. Management fees will generally have a UK source where the fund manager is working in the UK, regardless of the location of the fund and its investments. Carried interest will also generally be treated as UK source where the investment manager is living and working in the UK. However, if the investment manager is providing services overseas, they would be able to treat part of the carried interest as foreign sourced.
Fund managers with non-domiciled status should start considering the implications of possible changes to the relevant rules and plan accordingly.
Changes to Trading Profits Allocation for Partnerships and LLPs
From 6 April 2024, all self-employed traders, including partners in trading partnerships, will report and pay tax on profits arising within the tax year. Consequently, unless the partnership year end aligns with the end of the tax year, partners will be required to apportion their partnership profits for two accounting periods when preparing their self-assessment tax return.
As accounts for the second period may not be available by the tax filing deadline of 31 January, an estimate of the profit will need to be made for the latter period and the return subsequently amended when final figures are available. For investment managers, this may be particularly challenging when having to estimate performance fees.
If the accounting and tax years have not already been aligned, this could be considered to avoid potential interest charges and possibly penalties.
LLP Partners as Salaried Employees
LLPs currently only pay employers national insurance contributions on employees salaries and not the earnings of self employed partners. HMRC have clearly been looking for opportunities to reclassify LLP partners as ‘salaried’ and consequently, taxed as an employee, losing their self employed status. Whilst HMRC has had mixed results in this regard (see HMRC v BlueCrest Capital Management (UK) LLP), the potential revenue at stake is substantial and as such, reform of the NIC rules could be a consideration.
VAT Treatment of Fund Management
In December 2022, the Government issued a consultation paper on the VAT treatment of fund management services. Following the consultation, the Government decided that no change was necessary and that fund management services would continue to be exempt for the majority of fund types as listed in the VAT legislation. However, it was also noted that the fund management sector requested greater certainty around the definition of what constitutes ‘management’ of a fund and this will be considered in more detail as part of the current guidance review.