In April 2026 the tax treatment of carried interest in the UK will change markedly. Currently, carry is taxed as a return on investment that reflects its actual form and which results, for the highest rate taxpayers, in rates of 28 percent on gains, 45 percent on interest and 39.35 percent on dividends.

Jenny Wheater, Debevoise & Plimpton

In October 2024, it was announced that this treatment will alter, and a summary of the new proposals was published. From April 2026, carry will be taxed as the profits of a deemed trade. Trading profit is generally taxed at 45 percent and subject to national insurance contributions of 2 percent in addition. However, “qualifying” carry will be subject to tax at a lower rate – 72.5 percent of the prevailing rates – resulting in an effective overall rate of 34.075 percent.

To be treated as “qualifying,” carry will need to fall outside the existing “income based carried interest” or “IBCI” rules. These rules will be amended so that they will be applicable to all carry; currently there are limits on their application so that many carryholders (including most carryholders who are employees as opposed to self-employed partners, LLP members or consultants) are unaffected. They will also be modified to address specific concerns relating to certain fund strategies.

Broadly, for carry to fall entirely outside the IBCI regime and thus be “qualifying” under the new rules, the average holding period of the relevant fund’s investments must be at least 40 months. Where a fund’s average holding period is 36-40 months, carry will be partly “qualifying” and where it is less than 36 months carry will not be “qualifying”.

Special rules may apply to specific fund strategies and types of investment. As stated, these are likely to be altered to render the regime more accessible for some – for example, credit funds. Navigation of the IBCI regime may require some complicated considerations, so this will necessitate some care.

“Navigation of the IBCI regime may require some complicated considerations so this will necessitate some care”

Treatment as deemed trading profit brings some issues for the internationally mobile, which are yet to be fully resolved. Currently, non-residents are generally not taxable on any UK-source carried interest since the UK does not tax non-residents on the profits of UK investment except in limited cases.

Trading profit is different. The deemed trade will be that of each individual carryholder and will be treated as being carried on in the UK to the extent the relevant investment management services are performed in the UK, and outside the UK to the extent such services are performed outside the UK.

Under UK law, non-resident individuals are subject to UK tax on profits from a trade to the extent that trade is carried on in the UK. Thus, if a non-resident receives carried interest which HM Revenue & Customs regard as being derived from investment management services performed in the UK (even years previously), there may be UK tax exposure in a way that would not be the case now, with carry treated as an investment return. This is proving to be an area of considerable contention, with the availability of treaty relief and the need for some “safe harbors” on UK activity being areas of current discussion.

Draft legislation is expected in the summer.