The UK government has been making a lot of changes lately to how those in finance do business. From separating divisions of big banks to sweeping reviews of the asset management industry, a lot has been changing recently.
In an effort to crack down on tax dodging, the UK government has set out new rules on the taxation of performance-based rewards paid to asset managers.
The latest document put forth by the government determines when performance-based rewards given to fund managers should be taxed as income and when they should be taxed as capital gains.
The government originally discussed two options:
The first involved a list of specific activities and asset classes that would warrant capital gains tax treatment.
The second option focused on the length of time the investments of the funds are held (a proposed 2 years) using a graduated system whereby the proportion of any performance based-return eligible for capital gains tax would increase incrementally from 0 per cent to 100 per cent.
The government decided to go with the second option, but it extended the period investments are held to four years or more. This means the kinds of funds affected will be ones such as credit funds and venture capital funds that have a typical average holding period of three years. Funds with an average holding period of less than three years that don’t hold a carried interest structure will not be affected.
The cited reason for choosing the second option was that going by an investments time held was found to be simpler to execute with a greater degree of certainty, but many respondents weren’t happy with either option.
British Private Equity & Venture Capital Association director general Tim Hames believes the proposed holding period should be three years (not four) to better reflect the “impact that the economic cycle has on industry activities.” He also believes that more explicit provisions should be set out to protect both the venture and growth capital sectors where minority stakes are the norm.
The head of corporate finance faculty at the Institute of Chartered Accountants in England and Wales David Petrie worries that the effect of the changes on venture capital funds could create “a funding gap.” As he summarized, “It is important that carried interest of venture capital funds is treated as capital gain because it is a risky investment. However, what you don’t want to do is to create unintended funding gaps. We have to make sure VC funds don’t find themselves excluded from investments into new businesses. You don’t want a tax system which makes UK investments less attractive.”
Only time will tell how these new regulations unfold and how it affects the industry itself in the long term.
Mickael Marsali’s financial and asset management expertise stem from his long standing career in the UK’s financial sector. Please visit his website for more info.