Disguised Investment Management Fees (DIMF)

July 5, 2017


In the past two years, HMRC have introduced various new rules in an attempt to tighten the tax regime applicable to investment funds and their UK-based fund management executives and service providers.

The new rules broadly seek to tax any amounts arising to fund managers from the collective investment scheme funds they manage as fee income (with a top tax rate of 45%), regardless of the underlying nature of those amounts at fund level.


There are two key exceptions:

  • Amounts which are performance related (carried interest) and

  • Amounts arising through genuine investments made by managers on arm’s length terms (Co-investment)

Carried interest and self-funded profits will continue to be taxed under the capital gains tax (CGT) regime, with a top tax rate of 28%.

The primary target of these rules is the typical “GP – LP” private equity structure, although the legislation is now broadly drafted such that most investment management structures will fall within the new regime.


Key changes


The key areas for investment funds and their managers to be aware of are summarised below:


1.) Disguised Fees

  • Where an individual performs investment management services and a management fee arises to that individual, the whole fee is treated as trading profits chargeable to income tax in their hands.

  • A management fee is described as any sum except:

    • Carried interest (although see below);

    • An arm’s length return on the investment made by the individual in the investment scheme (co-investment, made on terms reasonably comparable with outside investors, suffering the same economic risks);

    • Repayment of the original investment made by the individual or

    • A fee that has otherwise been taxed as employment or trading income of the individual

  • These rules apply from 6 April 2015 onwards

2.) Income based carried interest

  • Carried interest can be partially charged to income tax, if the average investment holding period of the fund is between 36 and 40 months

  • Carried interest returns will be fully charged to income tax if the average investment holding period of the fund is less than 36 months

  • These rules apply from 6 April 2016 onwards

The new rules are complex, and if you carry out investment management services or otherwise participate in an investment fund, you should seek advice to ensure your tax position is not unduly affected by these changes. 




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