UK carried interest regime: draft legislation confirms scope and conditions

From 6 April 2026, the draft legislation provides that individuals performing investment management services who receive carried interest will be subject to income tax and Class 4 NICs. Provided that the carried interest profits meet certain qualifying conditions (see below), it will be eligible for a 72.5% multiplier, such that the effective tax rate on such carried interest profits would be 34.075% for additional rate taxpayers (i.e., 72.5% of qualifying carried interest will be taxed as income, at the additional income tax rate of 45%, plus NICs at 2%).

• From 6 April 2026, the draft legislation provides that carried interest less permitted deductions in whatever form it arises (i.e., capital gain, interest, dividends) will be subject to income tax as profits of a trade. Any capital gain accruing to the carried interest holder would be ignored for capital gains tax purposes. Therefore, the effective rate of tax on qualifying carried interest profits arising from interest (otherwise taxed at 45% for additional rate taxpayers) and dividends (otherwise taxed at 39.35% for additional rate taxpayers) will be reduced.
• In computing the carried interest profits, the only permitted deduction is the amount in money given for the carried interest, less the amount of any such consideration previously deducted in computing carried interest profits in an earlier tax year. Tax distributions, that is sums that arise only if tax becomes payable as a result of the individual’s entitlement to carried interest, are now expressly treated as carried interest.
• The employment-related securities rules, which can give rise to employment income tax charges where carried interest is acquired otherwise than for unrestricted market value, will take priority over the new carried interest rules, so that it will continue to be necessary to consider the application of the Memorandum of Understanding agreed with HMRC.
• In addition, if a sum arises to an individual performing investment management services from an investment scheme which is not carried interest or an arm’s length return on a co-investment in the scheme, then the individual can be subject to income tax on such sum at the full rate (i.e., 45% for additional rate taxpayers) under the “disguised investment management fee” rules (which have been retained with some modifications).
• In terms of territorial scope, an investment manager will be within the new carried interest rules to the extent that they perform their investment management services in the UK, but a non-UK resident investment manager is outside the carried interest regime where the services were performed prior to 30 October 2024, or where they spend fewer than 60 workdays in the UK performing investment management services, or where the workdays are prior to a 3-year period in which they were outside the scope of the UK carried interest regime. The draft legislation and commentary do not address how a double tax treaty between the UK and another jurisdiction will apply where the carried interest may be taxed in both jurisdictions, which is likely to be an area of further interest in the ongoing consultation with HMRC.
• For the purpose of the average holding period condition, the time at which an investment is treated as acquired and disposed of will generally be the date of the contract for the acquisition or disposal (or if the contract is conditional, the date the condition is satisfied). This is subject to more detailed rules, including that where part of a holding of securities of the same class are disposed of, then you apply a first in, first out basis to determine which securities have been disposed of. Unwanted short-term investments can be disregarded where they are sold within 12 months of acquisition and any profit has no significant bearing on whether carried interest arises.
• For real estate funds, there are special rules, including provisions which can mean that an acquisition of adjacent land is treated as made at the time of the acquisition of the original and the real estate fund is not treated as disposing of any land until more than 50% of the greatest amount invested in the land at any one time has been disposed of.
• For credit funds, there are special rules, including provisions which can mean that a disposal of a debt investment is treated as taking place after 40 months where a loan is repaid early by the debtor and the repayment date was at least 40 months after the time the loan was made.

The Government is still consulting on the detail of the draft legislation and there is an opportunity to provide comments until 15 September 2025.

Authored by Elliot Weston, Suzanne Hill, and Laura Hodgson.