Tom Pittman, Managing Director and Chief Marketing Officer for EWM Global, recently sat down with three distinguished tax attorneys: Steven Bortnick, Partner at Troutman Pepper, Aurell Taussig, Partner at Herbert Smith Freehills LLP, and Jonathan Blake, Head of International Private Funds Strategy at Herbert Smith Freehills LLP, to discuss updates and compare guidelines in the US and UK pertaining to taxation on carried interest.
The discussion began with Jonathan Blake – considered by many to be the father of private fund structure, at least in Europe – reminiscing about his conversation in 1987 with Norman Lamont, , then Financial Secretary to the Her Majesty’s Treasury. The conversation was tense at times, as Jonathan told Lamont the venture capital industry would continue to use offshore structures if the UK was insistent on taxing carried interest on investments the same as corporate executives’ bonuses. Secretary Lamont yielded and the private fund structure as a limited partnership was ratified. The rest, as they say, is history.
The next topic was Steven Bortnick discussing the finer points of the IRS and Department of Treasury’s recent guidelines on Section 1061 as it relates to tax treatment of carried interest. In general, Section 1061 requires a three-year holding period for an investment fund manager’s share of capital gains earned through a fund to be eligible for the lower tax rates applicable to long-term capital gain. This is a departure from the one-year holding period that is typically required for long-term capital gain treatment.
Aurell Taussig discussed similarities in the UK’s taxation of carried interest with the 36 month hold, plus he described various tax implications for non-domiciled individuals, US citizen’s working in the UK, as well as the implications of acquiring carry interest part way through the life of a fund.
Thank you to our panelists for their participation and valuable insight on these updated tax laws. Their contact information is available below if you have any questions pertaining to this discussion.