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The Summer Budget on Wednesday included many significant changes for the real estate industry. Many of these have been covered extensively elsewhere including in a comprehensive summary by the British Property Federation that can be found
In previous newsletters we covered changes introduced in the Autumn to challenge "disguised management fees" (see here). Although there were a few twists and turns in the process, the treatment of genuine carried interest arrangements was preserved. This week's summer budget introduced further changes. Although capital gains treatment of carried interest has been preserved, measures have been introduced to limit the deductions that can be offset against such gains. In particular, arrangements for "base cost shift" to reallocate base cost from investors to carry holders to minimise gains are no longer effective. Typically the full amount of any carry will now be taxed at 28% with effect from last Wednesday.
Summer Budget 2015
The broad approach is:
The overarching approach of the new legislation will be to establish a default rule that all performance linked rewards paid to an individual performing investment management services are charged to tax as income. However, the government proposes that the performance linked interests in vehicles that undertake specified activities may give rise to capital gains rather than income. It is expected that private equity carried interest will continue to be taxed as a gain, though that is dependent upon the investment strategy of the fund. The government invites comments on two options for achieving this:
Option 1 would list particular activities which are, in the government's view, clearly investment activity such that a performance linked interest in a fund vehicle performing such activities may be charged to tax as chargeable gains provided certain conditions are met;
Option 2 would focus on the length of time for which the underlying investments are held.
Under option 1, the following are assumed to be "investment" rather than "trading":
i) Controlling equity stakes in trading companies intended to be held for a period of at least 3 years.
ii) The holding of real property for rental income and capital growth where, at the point of acquisition, it is reasonable to suppose that the property will be held for at least 5 years.
iii) The purchase of debt instruments on a secondary market where, at the point of acquisition, it is reasonable to suppose that the debt will be held for at least 3 years.