What a gross return becomes after the terms and UK tax
A hedge fund or a private credit commitment, from the gross figure to what a UK resident keeps: management and performance fees, credit losses, leverage and tax, each measured on its own.
By Eldar Edmond Grady, CEO, PPLI.com · Research checked 23 September 2026
Alternatives carry two layers of cost
The manager's terms come first and are reported. The investor's tax comes second and is not. For a UK resident the second layer is often the larger, because most of what these funds produce is taxed as income.
Private credit returns are interest, taxed at the savings rate every year. A hedge fund that realises its gains each year is taxed on them each year, and if it is a non-reporting offshore fund the gains are taxed as income too (HS265).
A policy defers that tax only if the fund is permitted property or is chosen by an insurer-appointed manager you do not direct. Held outside a policy, the fund pays the full rate as the income arises.
£1,000,000 in a fund earning 10% gross, one year
Management fee 2%, performance fee 20%, no hurdle. As in the Hedge Fund X-Ray, fund fees are treated as not deductible, so the investor is taxed on the result before fees.
Gross gain 10% x 1,000,000 = £100,000
Management fee 2% x 1,000,000 = £20,000
Performance fee 20% x (100,000 − 20,000) = £16,000
Value after fees = £1,064,000
Reporting fund, CGT 24% on 100,000 tax £24,000 kept £1,040,000
Non-reporting, income 45% tax £45,000 kept £1,019,000The same fund leaves £21,000 less a year to an additional-rate taxpayer if it is a non-reporting fund. Check the fund's reporting status before buying it.
What the compact instrument assumes
Hedge fund
High-water mark applied, no hurdle, the asset class's income share and turnover. The management fee is not deductible; the performance fee is treated as an allocation of profit. Income at the savings rate, realised and closing gains at the CGT rate. The full X-Ray treats both fees as not deductible and lets you set the share of gains taxed as income.
Private credit
Drawn over three years to 95% invested, undrawn cash at 4%, 65% recovery on defaults, fund debt at 6.5%, management fee 1.25% on invested capital, 12.5% performance fee over a 7% preferred return. Interest taxed at the savings rate as it accrues.
Instruments and related reading
Hedge Fund X-RayFrom gross return to what you keep after fees and UK taxOpen →Private credit real yieldThe stated yield against the yield on committed capital after taxOpen →Tax drag calculatorThe annual tax cost, asset class by asset classOpen →Investment flexibilityPermitted property and insurer-appointed managersOpen →The personal portfolio bond rulesWhat a UK-workable policy may holdOpen →PPLI.com is not authorised by the Financial Conduct Authority and does not give personal advice. This is general information about UK law, not an invitation or inducement to enter into any insurance or investment contract. Policies issued by insurers outside the UK are not protected by the Financial Services Compensation Scheme (unless written through a UK branch).
The authorities this page relies on
HMRC helpsheet HS265
A gain on disposal of a non-reporting offshore fund is normally an offshore income gain, charged to income tax. A gain on a reporting fund is charged to capital gains tax. gov.uk, HS265
Income tax, savings and dividend rates
Savings rates 20, 40 and 45% in 2026/27. Dividend rates 10.75, 35.75 and 39.35% from 6 April 2026. Savings rates of 22, 42 and 47% from 6 April 2027 (FA 2026 s.5), shown here only as a labelled option. gov.uk, rate changes
Capital gains tax rates
18 and 24% for disposals on or after 30 October 2024. Business Asset Disposal Relief at 18% from 6 April 2026. Annual exempt amount £3,000. gov.uk, CGT rates
Personal portfolio bonds, ITTOIA ss.516, 520 and 522
A policy is a personal portfolio bond if the holder, a connected person or someone acting for them can select the assets outside the permitted categories in s.520. At the end of each insurance year except the last, a deemed gain of 15% of premiums plus earlier deemed gains is taxed, with no top-slicing relief. legislation.gov.uk, s.522
IPTM7725 and IPTM7730
An insurer-appointed manager normally avoids personal portfolio bond status, but a mandate restricted so tightly that the policyholder's instructions in effect determine the assets is treated as selection by the policyholder. gov.uk, IPTM7730
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