Autumn Budget 2025: Private Capital

Yesterday, the UK Chancellor delivered one of the most anticipated Budgets in recent times. There had been much speculation that it would include significant adverse tax measures for the private capital sector, but, in the end, the industry has emerged relatively unscathed - with none of partnership NICs, a wealth tax or an exit tax being introduced.

That being said, there is no doubt that this was a significant tax raising Budget, and the increased tax rates on property, savings and dividend income (which will also lead to increased withholding tax on interest and on property income distributions from REITs and PAIFs) will impact the private capital sector. In particular, for funds generating those types of income, ultimate returns will be reduced for retail and some non-resident investors, as well as for co-investing executives.

We did not learn anything further about the fundamental reform of carried interest coming into effect from 6 April next year, but we should not have to wait long. The finance bill is expected to be published next week, and will contain the next turn of the draft rules. Hopefully, the Government will take on board industry's comments on the initial draft consulted on over the summer.

Another issue notable by its omission, was the tax position of LLPs. As well as the (welcome) non-introduction of partnership NICs, the "salaried members" rules were also left untouched. Under these rules members of UK LLPs can be treated as employees for tax purposes – and there had been speculation that these might be tightened as a back-door way of introducing a charge akin to partnership NICs. However, the Government may look at those rules again if the Supreme Court next year reverses January's Court of Appeal judgment in BlueCrest, which was (surprisingly) favourable to HMRC. (Interestingly, the Budget did contain an announcement that "incorporation relief" will now have to be claimed rather than being automatic, so it may have been worrying about people planning to convert from LLP to company status.)

Although there were no headline grabbing tax announcements specifically focused on the private capital sector, there were several ones relevant to the position of executives, funds and investors. In particular, there was a package of announcements supporting entrepreneurs and early-stage businesses, including the increase of some of the limits in the Enterprise Management Incentives (EMI) regime, the introduction of a three-year stamp duty reserve tax relief for securities in companies newly listed on a UK regulated market and the launch of a call for evidence seeking views on tax support for entrepreneurs.

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UK carried interest reform – no further information

As expected, the Chancellor confirmed that the major structural reforms to the UK carried interest tax rules announced in last year's Budget will be going ahead. Broadly, under the new rules, from 6 April next year, all carried interest will be taxed as deemed trading income, but with a bespoke rate of around 34.1% potentially available. However, no further detail was provided, so it looks like we will have to wait for the publication of the finance bill (expected next week) to see the extent to which the Government will take into account comments made by industry on the draft legislation consulted on over the summer.

A particularly contentious issue with the new rules has been the Government's position that the UK's "payment on account" rules should apply to carried interest. Under those rules, self-employed individuals are required to make advanced payments on account of their expected future tax liability. This is likely to give rise to significant cash flow issues for executives as, although the rules work well for regular income streams, carried interest tends to be lumpy and unpredictable. The Budget does not shed any light on whether the Government intends to change tack, but says that there will be a consultation on "timelier tax payment" for those with self-assessment income. If that proposes accelerating the deadlines for payments on account, and carried interest is not excluded from that regime, this will exacerbate difficulties for executives.

Reform of permanent establishment (PE) definition and the investment manager exemption (IME)

As expected, the Government confirmed that it will be going ahead with its reform to the UK domestic law definition of PE and to the IME. The draft rules were consulted on over the summer, and the Budget confirms that some changes will be made in response to feedback received.

The concept of PE is important because having a PE can bring non-resident traders within the UK tax net on their profits (deriving from the establishment). Under the plans, the scope definition of PE will be expanded. This is potentially problematic for asset managers, as it increases the risk of them exposing their foreign clients to UK tax (by virtue of the manager constituting a UK PE of the client). Helpfully, the UK rules contain a specific exemption, the IME, designed to prevent that from occurring.

However, the current IME is not always applicable, and so managers often structure their affairs so as to fall outside of the basic PE definition (without having to rely on the IME), for example, by entering into advisory rather than discretionary management arrangements. The proposed reforms to the PE definition will make it harder for managers to do this, as the definition would include persons who habitually play the principal role leading to the conclusion of contracts by the non-resident (and not just, as currently, those who actually have signing authority) – potentially encompassing some advisory arrangements. This will make the IME more important, and so, to protect the industry, the Government is set to reform it, with the bulk of the changes designed to make it more accessible for private capital managers.

The Budget announcement makes clear that some changes will be made to the draft rules that were consulted on, including, helpfully, clarifying that the IME will apply to investment advisors and correcting some unintentional wording that restricted access to the exemption for some types of funds. The Budget also indicated that the new rules will come into effect for accounting periods beginning on or after 1 January 2026.

We should find out more next week, when we expect the amended rules to be published.

Consultation on the Qualifying Asset Holding Company (QAHC) regime

The QAHC regime was introduced in April 2022 and provides preferential tax treatment in relation to UK resident holding companies that meet the qualifying criteria. It is widely considered to be a successful product, with hundreds of QAHCs launched.

In the Budget, the Government announced that it will work with industry stakeholders over the coming months to explore targeted legislative changes aimed at ensuring the QAHC regime continues to operate effectively. The Government's slightly cryptic statement does not explain the nature of the reforms it has in mind, so it will be interesting to see what emerges. We will keep you posted.

Changes to IHT on trusts: introduction of £5m cap

The Government intends to cap inheritance tax charges that can be levied on certain trust property at £5 million.

Under rules that came into force on 6 April this year, a person's liability to UK inheritance tax depends on whether they are long-term resident (broadly, resident in the UK for 10 out of the last 20 years), rather than on their domicile, as was previously the case. For non-domiciled UK tax resident individuals ("non-doms") settling non-UK assets in trusts, the new rules meant that they could no longer rely on their domicile shielding those non-UK assets from inheritance tax. Instead, those assets, like any UK assets held by the trust, would fall within the scope of the "relevant property regime" for inheritance tax from 6 April 2025 (or whichever later date the settlor became long-term resident on). The relevant property regime levies a 6% charge on the value of the trust's in-scope assets, payable at 10-yearly intervals (beginning with the date of settlement) and whenever the assets exit the trust.

The Government proposes to cap the amount that each instance of this 6% charge can raise on non-UK assets that were settled before 30 October 2024 to £5m. New trusts, or trusts created by individuals who were not formerly non-domiciled remain chargeable in full, as do UK assets.

There is more complexity in respect of the proposed changes for trusts and settlements, which we will not be exploring in this summary.

This concession appears to be aimed at improving the attractiveness of the new residence-based regime for non-doms who settled non-UK assets into trusts pre-October 2024. It also follows an earlier concession provided to non-doms whereby trusts settled pre-October 2024 were not subject to inheritance tax on the settlor's death. While the concession will be welcomed by the non-doms affected, its modest scope is unlikely to compensate for the disappointment may non-doms experienced as a result of the 6 April rule changes.

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