Carried Interest (also know as “carry”) is incentive compensation provided to private equity fund managers to align their interests with the fund’s capital-providing investors.
Put simply, carry is a percentage of a fund’s profits that fund managers get to keep on top of their management fees, and is a significant component of private equity compensation.
It refers to the fund manager being carried by investors because it receives a share in profits disproportionate to its capital commitment to the fund.
Fund managers receive carry and a management fee, with the management fee relating to the work required to generate a profit, and carry typically applying when the fund generates profits above a certain hurdle rate.
How is carried interest/carry and other profits taxed?
The carried interest is subject to Capital Gains Tax. It is taxed as if it were an equity investment. New clauses are inserted by Finance Act 2016 which aim to ensure that investment fund managers will pay at least 28% tax on the economic value of the carried interest they receive - this is the same tax rate that applies to gains made on residential property. Arm’s length investments made by the fund manager will not be caught by the new rules and will be subject to the normal (20%) rate of CGT.
The fund manager's return on their investment is also taxed as capital, as if they were a third-party investor.
The investment manager is nevertheless subject to Income Tax on the part of this investment profit that can be shown as their fees from self-employment or employment income, being the management fees referred to above.
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Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.
