There are few phrases that strike fear into the heart of a Fund Manager quite like “HMRC is updating guidance.” But here we are.

In April 2024, the UK government began quietly reclassifying carried interest as “trading income” if the structure or activities of the fund fall afoul of updated Investment Management Exemption (IME) guidance. That means, if you're not careful, the 28% capital gains rate could suddenly become 45% income tax. That’s not just a rounding error but potentially a multi-million pound headache.

Recently, Bound brought together a panel of finance pros, tax lawyers from Addleshaw Goddard and CFOs from leading VC funds to make sense of it all. The verdict? There’s a lot at stake, and complacency is not an option.

We’ve compiled seven key learnings from the conversation, decoded and de-jargonified (that’s a word, right?) to help you prepare for upcoming changes in carried interest. 

1. Don’t panic (but don’t bury your head in the sand, either)

First things first: this isn't a blanket reclassification. The changes primarily target funds with activities that look more like trading than investing. Think high-frequency deal turnover, “flipping” assets for short-term gain, or building portfolios with venture studio-style involvement.

If your fund is structured like a traditional long-hold investment firm, you’re probably in the clear. But as one tax advisor put it, “probably” is doing a lot of work here. HMRC is increasingly focused on substance over form, and the “we’ve always done it this way” excuse won’t cut it anymore.

2. Venture studios and platform models are in the crosshairs

There’s a grey zone between passive investing and active trading. And that’s exactly where some modern VC models live.

Venture studios, for instance, often incubate companies in-house, contribute operational support, or co-create IP. If HMRC sees too much “active involvement,” it might decide that’s trading, et voila your carry becomes income.

The same goes for funds with beefy platform teams that dig into growth, marketing, or engineering. Valuable? Yes. Safe from tax reclassification? Not necessarily.

As one panellist put it: “The question is: are you making investment decisions, negotiating terms, originating deals? If that’s being done in the UK, you’ve got UK management activity, and it’s potentially within the income-based carried interest rules.”

3. Domicile decisions just got more important

If your fund is managed from the UK, you’re exposed to UK tax law, full stop. But many VCs – especially pan-European or US-based funds with UK General Partners (GPs) – are now reconsidering domicile and control structures.

Luxembourg remains popular for fund domiciles, but if decision-making authority is ultimately in London, that may not save you. Fund Managers need to think hard about where investment decisions are made, who’s on the investment committee (IC), and whether those processes are well-documented.

A warning from the experts: HMRC isn’t going to ask where your logo is – they’re going to ask where your decisions happen.

4. Deal-by-deal carry can be a red flag

Deal-by-deal carry is trendy in VC land, but it also increases scrutiny. That’s because it can give GPs a personal incentive to churn, which smells a lot like trading.

While perfectly legal, this model can nudge a fund into murky territory when combined with short holding periods, active value creation, or inconsistent structuring.

The advice from our panel? If you’re going to go deal-by-deal, you better have a watertight narrative – and a tax advisor who doesn’t flinch easily.

5. This isn’t just a tax issue; it’s a structuring wake-up call

This is about more than just tax. It’s about how funds tell their story on paper, in practice, and to regulators.

Therefore, Fund Managers should be reviewing:

• IC structures and minutes

  • Are decisions clearly documented?

  • Where do they happen?

• GP/LP agreements

  • Do they reflect actual behavior?

• Employment contracts and incentive schemes

  • Are they consistent with investment roles?

• Level of operational involvement in portfolio companies

  • Are you crossing the line from advisor to operator?

In other words: if HMRC comes calling, will your structure match your reality?

6. Think two steps ahead

If there was one unspoken mantra humming beneath the surface of the entire discussion, it was this: don’t just plan for today but also for the regime two years from now. 

That means taking a proactive stance on everything from non-dom status and inheritance tax to long-term team composition and potential relocations. GPs are increasingly asking: if our CFO wants to move to Portugal next year, or if one partner plans to step back and pass on assets, what does that mean for our structure, tax exposure, and compliance narrative?

The sharper Fund Managers are already stress-testing their setups against future political shifts and regulatory tightening.

7. There's still time to course-correct, but the clock is ticking

This isn’t a retroactive enforcement blitz (yet), but enforcement is coming and the smart funds are getting ahead of the curve. Some are redesigning their carry structures. Others are revisiting where board seats are held or how equity is granted to GPs.

As one fund CFO summarised, this is a ‘trust-but-verify’ moment. Trust that HMRC has a rationale. Verify that you’re not sleepwalking into income tax territory.

Next steps

Here’s our immediate to-do list for Fund Managers and CFOs:

1. Get a fresh tax opinion. Don’t rely on the one from 2018. The rules have changed.

2. Stress-test your fund structure. Especially if you’re hands-on with portfolio companies.

3. Look at your IC and governance protocols. If your decision-making is London-centric, you’re exposed.

4. Start papering your narrative. Minutes, memos, agreements: everything should tell the same story.

5. Don’t assume you’re too small to matter. HMRC doesn’t care how big your fund is, if your structure looks off you’ll get pulled up on it.

Final thought: HMRC doesn’t hate you (but it might think you’re getting away with too much)

The UK’s treatment of carried interest has always been a bit of a political powder keg. With increased scrutiny on inequality and tax fairness, this shift feels inevitable. That doesn’t mean it’s fair, but it does mean you need to get serious. Because when it comes to carried interest, “better safe than sorry” might just be the best investment advice you hear this year.

No opinion given in the material constitutes a recommendation by Bound Rates Limited that any particular transaction or investment strategy is suitable for any specific company or person. Results may and will vary. The information in this publication does not constitute legal, tax or other professional advice from Bound Rates Limited or its affiliates