Carried interest tax reform - how it will work from 6 April 2026
Carried interest tax reform - how it will work from 6 April 2026
The upcoming changes to the taxation of carried interest are significant. They will have an impact on the environment in which asset managers operate, and their reward structures. HMRC has released the draft legislation for the UK’s new carried interest tax regime, which you can find here. Final legislation will follow in the Finance Bill 2026. The new regime will affect carried interest arising on or after 6 April 2026.
This article provides a summary of the changes and focuses on key practical considerations of the changes for asset managers to consider in the meantime.
What are the key changes to the Taxation of Carried Interest?
From 6 April 2025, the carried interest capital gains tax rate increased from 28% to 32%. From 6 April 2026, a new carried interest regime will apply, treating all carried interest as trading profits subject to income tax (up to 45%) and Class 4 NICs (2% on profits above the Upper Profits Limit). The amount of ‘qualifying’ carried interest subject to these taxes will be adjusted by applying a 72.5% multiplier, resulting in an effective tax rate of 34.075%.
Income tax regime
The draft legislation introduces a revised tax regime that sits wholly within the income tax framework, with all carried interest treated as trading profits and subject to income tax and Class 4 NICs. ‘Qualifying carried interest’ is subject to a 72.5% multiplier, resulting in a 34.075% effective tax rate for an additional rate taxpayer.
No additional qualifying conditions in respect of co-investment or personal holding period requirements will be applied to the qualifying carried interest regime.
Foreign Income and Gains ("FIG") regime
For fund executives eligible under the FIG regime, the draft legislation contains definitions for ‘workdays’ and ‘UK workdays’, to determine the amounts that may qualify for tax relief. Broadly, foreign workdays are days where the executive carried out any investment management services abroad, with no minimum number of hours required. UK workdays require more than three hours of investment management services provided on any fund in the UK. There are also prescriptive rules to allocate international travelling time as either UK or foreign for these purposes.
The draft legislation envisages that executives should factor in all periods from when the carried interest arrangement(s) were first devised, up to the date when the carried interest ‘arises’.
Territorial scope
For non-UK residents, there are statutory limits to the international scope of the new rules that should lessen the impact:- For a non-UK resident, any services performed in the UK prior to 30 October 2024 will be deemed to be non-UK services.
- The rules will also disregard any UK workdays performed in a tax year in which an individual is non-UK resident and does not meet the ‘UK workday threshold’, which is set at 60 days.
- There will be a time limit to the ‘tail’ for a non-UK resident. Any carried interest received after they have been non-UK resident for three full tax years will be outside the scope of taxation under the carried interest regime, provided that in each tax year they did not meet the UK workday threshold.
The above will apply in addition to any relief applicable under a double tax treaty. This could be relevant if an executive has not been non-UK for at least three tax years or has exceeded the 60 days UK workday threshold. For those non-residents who are subject to tax in the UK there may still be complexities with double tax treaty relief.
Temporary non-residents
Where a carried interest capital gain is treated as arising to an individual during a period of ‘temporary non-residence’ in the 2025/26 tax year or earlier, the individual will be subject to tax on the carried interest capital gains in the year they return under the new qualifying carried interest regime, ie as trading income with the benefit of the 72.5% multiplier.
Transfers of carried interest
There are charging provisions that can tax the individual where there has been a disposal, variation, loss or cancellation of carried interest entitlements by either the individual or a ‘relevant person’. The extension of these rules to a ‘relevant person’ is new and would cover transfers of carried interest made by some family members and family trust structures.
Death
On death of the individual, there are new provisions that subject whoever receives the carried interest - eg beneficiary of the estate - to tax as qualifying or non-qualifying carried interest and thus subject to income tax and NIC.
Payments on Account
Carried interest would be treated as trading profits and thus subject to payments on account. The draft legislation does not contain any carve outs from these rules despite the representations made to HMRC. The impact of Making Tax Digital should also be considered.
Income-based carried interest (‘IBCI’) rules
IBCI rules will apply to both employees and non-employees (eg LLP members). The IBCI rules will be referred to as the average holding period (‘AHP’) condition in future. There are many amendments to these rules, including:
- Conditionally exempt carried interest – under the draft legislation it is possible to make a claim for 100% of the carried interest to be treated as qualifying in certain cases - broadly, if the AHP over the life of the fund would be such that the carry would be qualifying. This is similar to an existing mechanism.
- Direct lending funds – previously, carried interest arising from a direct lending fund would be treated as IBCI (unless an exemption applies). This has been removed.
- Credit funds – new provisions introduced deem debt investments together with certain connected equity investments as being made and disposed of at a specific time.
- Funds of funds and secondary funds – both strategies are now covered under one funds of funds section.
Wider definitions
There are changes to definitions including the meaning of an ‘investment scheme’. This has been expanded to include an Alternative Investment Fund within the meaning of certain regulations. This change will apply to the qualifying carried interest regime as well as the disguised investment management fee rules.
Carried interest - next steps for asset managers
In light of the upcoming changes and inherent uncertainty, asset managers should take proactive steps to navigate the evolving landscape. Below are practical considerations and actions to address the potential impact of the new rules:
Timing of crystallisation
All carry arising from 6 April 2026 will be subject to the new regime. With different sets of rules to consider for amounts arising at different times, the point of crystallisation will be critical. It will be important to review your pipeline of exits and understand the implications for carried interest holders.
Investment holding periods
Both current and new funds should review investment holding periods to determine whether the qualifying carried interest rules apply to both employees and self-employed fund executives. Private Equity houses will need to implement procedures for monitoring and documenting these periods to ensure compliance.
Globally mobile individuals
Firms will need to assess the impact on globally mobile individuals including access to double tax treaty reliefs and the new Foreign Income and Gains (FIG) regime. Additionally, firms will need to ensure individuals moving to or leaving the UK are aware of the impact of the latest developments on the new carry regime.
Wider reward strategies
This could be an opportunity to re-evaluate fund manager rewards and how they align with investor expectations. While carried interest remains a key incentive, alternatives such as profit shares, growth shares and shadow carry arrangements could simplify administration and maintain competitiveness.
Cashflow
Under the new regime, income tax and Class 4 NICs paid in the previous tax year on carried interest will be relevant to the calculation of any payments on account due. As such, cash flow management will be important for carried interest holders.
An early assessment of the impact of Making Tax Digital (“MTD”) should also be considered. From 6 April 2026, it is expected that DIMF will come into MTD. This will mean that individuals will need to file quarterly reports detailing their trading profits to HMRC. For the first year of operation, only individuals who reported trading profits (including DIMF and IBCI) in the year 2024/25 will be brought into the MTD regime. The details of MTD are still being finalised, but HMRC’s current intention remains for this to come into force as scheduled.
By addressing all these areas now, Heads of Tax and wider finance teams can better position their organisations to adapt to the changes ahead. This will help ensure compliance, operational efficiency and alignment with long-term business goals.
Next steps for finance teams and Heads of Tax
In advance of the final rules being published, Heads of Tax and finance teams can prepare by:
- Looking ahead to future exits and understanding how they will impact the carried interest holders
- Implementing procedures for monitoring and documenting investment holding periods for AHP purposes
- Looking at the position for key globally mobile individuals, and thinking about future inbound individuals and the tax landscape for them when coming to the UK and how this impacts them now and post leaving the UK
- Considering reward options such as profit shares and growth shares or shadow carry arrangements
- Reviewing fund and deal structuring alongside carried interest structuring as existing structures may no longer be effective.
How we can help
We can help you plan for the upcoming changes by assessing the impact on you, your team and your investment structures. Our team works across various specialisms including partnership tax, corporation tax, personal tax, VAT and transfer pricing. We will also work across multiple jurisdictions. If you would like to discuss the changes to carried interest rules or your structures more generally, please feel free to get in touch with Jennifer Wall.