One area of potential tax reform that we know we should expect to hear more about on Budget day surrounds the tax treatment of ‘carried interest’.

This tax break enables private equity fund managers to pay a reduced rate of tax on their earnings. It is, as the Financial Times describes, a ‘share of the overall profits of a private equity fund paid out to the fund’s investment managers’.

The Chancellor Rachel Reeves has been quoted in the past as calling it ‘absurd’. And in the Labour General Election Manifesto, the party claimed that it would raise £565million through closing the ‘loophole’.

If you haven’t heard of this before, this is how the Government describes it: ‘Carried interest is a form of performance-related reward received by fund managers, primarily within the private equity industry. Unlike other such rewards, carried interest can currently be taxed at Capital Gains Tax (CGT) rates of 18% and 28%.’

The Government has said to ‘expect a further announcement at the Budget’ on this subject. It follows a call for evidence – or consultation – launched in July and now closed.

This document, in a section called ‘the case for reform’, elaborated on the reasons why the Government is focusing on it and what it will do, saying: ‘The Government believes that the current tax regime does not appropriately reflect the economic characteristics of carried interest and the level of risk assumed by fund managers in receipt of it. As a result, the Government will be taking decisive action.’

There were three main areas that the Government wanted to hear views on:

– How can the tax treatment of carried interest most appropriately reflect its economic characteristics? 
– What are the different structures and market practices with respect to carried interest? 
– Are there lessons that can be learned from approaches taken in other countries?