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.
 

June 2025 update

The reforms were originally announced as part of the Autumn Budget in 2024, and the Government published an update on the reforms on 5 June 2025. HM Treasury have listened and responded positively to concerns raised by the industry over the undue complexity and anti-competitive nature of the of the rules. The Government has promised to release the draft legislation for technical consultation before the parliamentary Summer Recess of 2025. This still leaves a degree of uncertainty for asset managers currently setting up and operating carried interest structures.

Many are adopting a wait-and-see approach, but our experience is that it is always helpful to look forward and plan ahead if possible. This article focuses on key practical considerations for asset managers.
 

What are the 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%.

Qualifying carried interest

Carried interest will be qualifying if it is not Income Based Carried Interest (IBCI). Broadly, IBCI is carried interest arising from funds with an average investment holding period of 40 months or less, with tapering relief where the average investment holding period is between 36 and 40 months.

A significant change is that employees will no longer be excluded from the IBCI rules, significantly broadening their scope. However, the government intends to change the average holding period conditions under the IBCI rules for private credit funds and secondary funds. These changes are intended to make it easier for such funds to realise qualifying carried interest.

In an easement compared to the original proposals, the Government will not proceed with the additional conditions of a co-investment and personal holding period requirement to fall within the qualifying carried interest regime. This is welcome news. Through the consultation period it was fed back to HMRC and HM Treasury that there were many practical challenges in relation to introducing these requirements, particularly in relation to the co-investment condition.

Carried interest; non-residents

There will be statutory limits to the international scope of the new rules, which should significantly reduce the impact on internationally mobile carried interest recipients.

• 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 during which time they did not meet the UK workday threshold, will be outside the scope of taxation under the carried interest regime
• UK workdays will be calculated solely by reference to day count.

 

The above will apply in addition to any relief applicable under a double tax treaty if the individual does not have a ‘permanent establishment’ in the UK.

However, challenges remain. The interaction with the new UK Foreign Income and Gains (FIG) regime will need to be considered for those coming to the UK. For those non-residents or dual residents who are subject to tax in the UK there may still be complexities with double tax treaty relief. As such, internationally mobile individuals will still need to carefully consider the implications of the changes.
 

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

The latest release appears to confirm that existing structures will not be grandfathered, and so 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 IBCI 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, 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

Use this as 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 carried interest will come into MTD, since carry will be treated as trading profits. 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 disguised investment management fees 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 IBCI 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
• Consider reward options such as profit shares and growth shares or shadow carry arrangements
• Review 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.