UK: UK Private Equity Funds: Tax-Efficient Structuring

Last Updated: 1 November 2012
Article by Terence Pay

London is home to a number of major private equity (PE) funds and many more boutique investment houses providing important venture capital to growing businesses.

The success of London as a centre for private equity is due in part to the favourable tax treatment available to investors and, in particular, investment managers, which ensures London is home to a considerable pool of industry talent.

Basic Structure

A typical UK PE fund is structured as follows:

Main PE Fund

This is commonly structured as an English or Scottish Limited Partnership (LP). A Scottish LP is particularly suitable as it may hold assets in its own name as a legal entity separate from its partners.

The LP is the vehicle of choice as it is tax transparent for UK tax purposes (and in many but not all other jurisdictions). This ensures no tax leakage at LP level; instead, any tax due on the income and gains of the fund is levied at the level of the investor (limited partner) according to each investor's individual tax status and residence. Investors remain liable to UK tax on UK source income (subject to any tax treaty relief for non-resident investors) but according to UK domestic tax law non-resident investors would not generally be taxable on UK-source dividends or capital gains.

An LP is the perfect vehicle for collective investments as it allows for passive investors (Limited Partners) to ring-fence risk whilst the active investment manager (General Partner) manages assets on their behalf and assumes general unlimited liability. As a collective investment vehicle the fund and its managers will be subject to UK regulatory requirements.

Investors (Limited Partners)

The investors (who may be individuals, an SPV or institutional) subscribe capital to the partnership to be invested by the general partner / investment manager. As a limited partner, liability is limited to capital subscribed, providing the investor remains a passive investor and does not take part in the management of the fund. In practice, a very small proportion of the initial investment fund is subscribed as partnership capital; the vast majority of funds are advanced as partnership loans carrying a favourable rate of interest as an initial return on investment.

General Partner (GP)

The GP is responsible for the management of the partnership and carries unlimited liability, for which reason a limited liability company is often used. Although the GP could directly manage the investments, this is generally delegated to an investment manager in London.

The GP itself will often be incorporated in an offshore jurisdiction (from which it should be managed) in order to mitigate any risk of the entire fund being brought on-shore for tax purposes (in theory this would not have a negative tax impact providing the fund is not viewed as a trading entity, but in practice the GP will be kept offshore to mitigate all such tax risks). The GP will take an annual management fee as a first share of the fund's profits.

Investment Manager LLP

The fund executives will typically form a tax-transparent UK vehicle to act in the UK as investment manager to the GP and hence the fund. An arm's length investment management contract will exist between the GP and the investment manager. A limited Liability Partnership (LLP) is used as at is more suited to such a trading function than an LP, whilst maintaining UK tax transparency. The partners will be subject to UK tax on their profit shares from the LLP but crucially these profit shares will not be subject to employers' Class 1 National Insurance contributions which reduces the overall taxation burden.

Carried Interest LP

Potential entitlement to "carried interest" – i.e. a performance-related share of the fund "super profit" – is the primary incentive for the fund executives. A separate carried interest LP is formed through which the executives contribute a small amount of capital to the fund at the outset, with the intention that the LP will receive the carried interest when the fund reaches "hurdle".

The UK taxation treatment of the receipt of such carried interest for UK resident fund executives has typically been very attractive and has served to make the UK an attractive jurisdiction for fund executives. The use of an LLP as a carried interest vehicle ensures that the capital gain element of the carried interest (typically the principal element of profit) is taxed as a capital gain in the hands of each partner at a maximum rate of 28%, rather than income rates of up to 52%.

Where a corporate vehicle is used as advisor (as with some PE funds), it is still possible to achieve capital gains treatment on the carried interest, despite the fact that the acquisition of the fund's underlying share investments as an employee or director would normally be taxed as an income receipt. The basis of this favourable capital treatment is a Memorandum of Understanding (MOU) between HMRC and the British Venture Capital Association. HMRC undertake in the MOU not to treat the carry acquisition as "employment related securities" providing a number of conditions are met, such as the fact that directors and employees should be paid an arm's length salary.

The availability of entrepreneur's relief on the disposal of a business interest means that it can be possible with appropriate structuring to reduce the overall capital gains tax rate to 10%.

UK Holding Company

A UK (or other) holding company may or may not be appropriate in a fund structure, according to the profile of the underlying investments. If there are overseas investments which are likely to pay dividends then a UK holding company may assist in securing double tax treaty benefits (the fund LP itself would be unable to avail of such benefits as a transparent vehicle). The UK dividend tax exemption should be available for receipts of dividends from qualifying investments by the UK company. It would be important to ensure that capital gains relief is available to the company on an eventual disposal of an investment. The Substantial Shareholding Exemption would apply in cases where at least 10% of the issued shares of the investee company have been held for at least 12 months, providing it is a trading company.


London is a prime location for the private equity industry. One of the attractions of the UK as a jurisdiction is the way in which a PE fund can be structured in a way which is tax efficient both for investors and for the investment managers based in London. Tax leakage at fund level can be eliminated for both UK and non-UK resident investors, whilst the primary profit share for managers can be structured in such a way that it is taxed more favourably as a capital gain.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Terence Pay
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.