Partnerships and capital gains tax structures
Discussion
So Trump has had a go at hedge fund tax structures. I think he's an odious individual, but probably mostly agree with him on this one. I thought this was a loophole HMRC had closed a while back, when the the PE guys took a kicking in the UK.
But I recently heard a rumour I heard that the partners in a Magic Circle law firm are have structured it such that they pay CGT on their yearly earnings (at 28%), and not income tax (which would be at 45%). This seems even further from legit CGT than the PE/Hedge fund carried interest structures.
a) Anyone know if this is true?
b) If they're managing to make it work, I can't think the partners of other professional services firms aren't doing similar
c) How does this work legally? And how is HMRC unable to close this particular loophole?
But I recently heard a rumour I heard that the partners in a Magic Circle law firm are have structured it such that they pay CGT on their yearly earnings (at 28%), and not income tax (which would be at 45%). This seems even further from legit CGT than the PE/Hedge fund carried interest structures.
a) Anyone know if this is true?
b) If they're managing to make it work, I can't think the partners of other professional services firms aren't doing similar
c) How does this work legally? And how is HMRC unable to close this particular loophole?
As long as we have major discrepancies in tax rates between all the different types of taxes you will get these schemes where people try to pretend that income that would normally be taxed under one of the higher rate taxes is really a different type of income that just happens to be income that falls into tax category that happens to be charged at a lower rate.
Agree, but this one seems to be incredibly blatant. I'm sure you're not suggesting that the discrepancies make the behaviour OK.
(Though my personal favourite dodge has to be the classification of pupillages as 'scholarships', making them tax free. Some of these pupillages pay £60k for the year...)
(Though my personal favourite dodge has to be the classification of pupillages as 'scholarships', making them tax free. Some of these pupillages pay £60k for the year...)
Can't comment on whether it's true but it wouldn't surprise me. There were (or probably still are) schemes available to convert income to capital gains. I looked at several of them when tax was at 50% and made the decision that I wanted to sleep at night and not have a potential back dated tax bill (with possible penalties and interest etc). I do sometimes regret that decision when I see others doing it without any consequence (apart from having more money that is )
I guess a firm of lawyers wouldn’t worry about consequences as they a bigger legal army than HRMC 
As Eric says whilst there is a disparity in tax rates, it’s bound to happen (rightly or wrongly). I personally still feel income tax is too high, and needs to come down to 40% or below which seems like a ‘fairer’ amount to pay.
Tax right now for higher earners / business owners is pretty discriminatory – the removal of the tax free allowance leading to a marginal rate of tax of 60%, the restrictions on pensions (unless you have a defined benefit public sector scheme ofcourse), changes to dividend tax, and some would say the changes in BTL tax (but that’s a whole different thread).
You may moan about it, and I don’t think it’s right, but this behaviour will continue until George stops strangling top earners with high Income Tax.
I guess a firm of lawyers wouldn’t worry about consequences as they a bigger legal army than HRMC 
As Eric says whilst there is a disparity in tax rates, it’s bound to happen (rightly or wrongly). I personally still feel income tax is too high, and needs to come down to 40% or below which seems like a ‘fairer’ amount to pay.
Tax right now for higher earners / business owners is pretty discriminatory – the removal of the tax free allowance leading to a marginal rate of tax of 60%, the restrictions on pensions (unless you have a defined benefit public sector scheme ofcourse), changes to dividend tax, and some would say the changes in BTL tax (but that’s a whole different thread).
You may moan about it, and I don’t think it’s right, but this behaviour will continue until George stops strangling top earners with high Income Tax.
This isn't true, there isn't a way of doing this that works.
The taxation of carried interest isn't a loophole, it is how the rules work in this country as it is a capital return, it isn't converting income into capital. Not saying it is right or wrong but it's a completely different thing to some iffy scheme.
The taxation of carried interest isn't a loophole, it is how the rules work in this country as it is a capital return, it isn't converting income into capital. Not saying it is right or wrong but it's a completely different thing to some iffy scheme.
Kendrik said:
This isn't true, there isn't a way of doing this that works.
The taxation of carried interest isn't a loophole, it is how the rules work in this country as it is a capital return, it isn't converting income into capital. Not saying it is right or wrong but it's a completely different thing to some iffy scheme.
Please can you explain in layman's terms how carried interest applies to a Law firm partnership structure. I'd be very interested to know how their professional fees are legitimately (without the aid of a 'scheme') classed as a capital return. The taxation of carried interest isn't a loophole, it is how the rules work in this country as it is a capital return, it isn't converting income into capital. Not saying it is right or wrong but it's a completely different thing to some iffy scheme.
I have knowledge of the tax affairs of one Magic Circle law firm, and can confirm that the partners pay tax at normal income tax rates, without any dodgy tax structuring.
In practice, as some of the firm's profits are earned in countries with tax rates higher than the UK (e.g. Belgium, Netherlands), the UK partners pay tax worldwide at a rate of more than 45% of profits.
p.s. OP - if you do have any reasonable evidence of this tax planning, www.rollonfriday.com or www.legalcheek.com would be very keen to hear it...
In practice, as some of the firm's profits are earned in countries with tax rates higher than the UK (e.g. Belgium, Netherlands), the UK partners pay tax worldwide at a rate of more than 45% of profits.
p.s. OP - if you do have any reasonable evidence of this tax planning, www.rollonfriday.com or www.legalcheek.com would be very keen to hear it...
Edited by schmunk on Wednesday 2nd September 11:08
foliedouce said:
Kendrik said:
This isn't true, there isn't a way of doing this that works.
The taxation of carried interest isn't a loophole, it is how the rules work in this country as it is a capital return, it isn't converting income into capital. Not saying it is right or wrong but it's a completely different thing to some iffy scheme.
Please can you explain in layman's terms how carried interest applies to a Law firm partnership structure. I'd be very interested to know how their professional fees are legitimately (without the aid of a 'scheme') classed as a capital return. The taxation of carried interest isn't a loophole, it is how the rules work in this country as it is a capital return, it isn't converting income into capital. Not saying it is right or wrong but it's a completely different thing to some iffy scheme.
I'd be very surprised if any MC law firm is able/does plan for tax in this way. As a tax partner at one of the Big 4 accounting firms, I can confirm that we pay tax at normal income tax rates and would never enter into any scheme which purports to convert income to capital - even where we are aware of them. I suspect the MC law firms would take the same stance.
The Disguised Investment Management Fee rules were brought in to stop this in respect of Collective Investment Schemes (eg Private Equity). And the changes this year to Carried Interest taxation are designed to make sure the "real" gain is taxed as opposed to a reduced gain which often arose due to a quirk in the rules which allowed costs to be offset which the PE execs had not incurred (basis shift).
The Disguised Investment Management Fee rules were brought in to stop this in respect of Collective Investment Schemes (eg Private Equity). And the changes this year to Carried Interest taxation are designed to make sure the "real" gain is taxed as opposed to a reduced gain which often arose due to a quirk in the rules which allowed costs to be offset which the PE execs had not incurred (basis shift).
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