Update on UK tax treatment of carried interest

How is carried interest currently taxed?

Carried interest is a form of performance-based reward for investment managers, typically structured as a share of the profits generated by an investment fund managed by those investment managers. For private equity, venture capital funds and real assets funds, these profits are primarily derived from capital gains arising on realisation of the underlying assets held by those funds. 

In last year’s Budget, the Government announced that from 6 April 2025, the capital gains tax rate applying to carried interest will increase to 32% (from 28% previously). It was also confirmed that from 6 April 2026, a revised tax regime for carried interest will be introduced and all carried interest will instead be taxed within the Income Tax framework, treated as trading profits subject to Income Tax and Class 4 National Insurance (NI).

What will the revised regime look like?

Yesterday (5 June 2025), the UK government published its official response and policy update on the taxation of carried interest, following extensive consultation with industry stakeholders. We are pleased to see that some of the key recommendations noted in our response to HM Treasury’s Call for Evidence and through the consultation process have been reflected in the most recent policy update.  

Of particular note the Government confirmed:

Removal of additional qualifying conditions 

• Additional conditions, regarding a minimum co-investment or minimum holding period before carried interest is realised, will not be introduced. 

Taxation of carried interest as trading profits 

• Carried interest will be treated as trading profits, subject to Income Tax and Class 4 NICs from 6 April 2026.
• A 72.5% multiplier will be applied to reduce the taxable amount, acknowledging the unique nature of carried interest in fund management. 

Average Holding Period 

• The exclusion for employment related securities from the average holding period (AHP) condition will be removed.
• Changes are to be made to the AHP conditions to ensure it operates fairly and reflects commercial realities across fund types – particularly with respect to private credit funds that pursue long-term strategies, fund of funds and secondary funds.

Territotial scope of revised carried interest regime

• Statutory limitations will be introduced such that non-UK residents will only be subject to Income Tax on carried interest to the extent that services were performed in the UK and all the following apply:  
  • UK services were performed within the previous three tax years
  • UK services were performed in a tax year in which the individual was UK tax resident or met the UK workday threshold (being 60 days)
  • where there is an applicable DTA, the UK services are attributable to a UK permanent establishment of the relevant individual.
• Any services performed in the UK prior to 30 October 2024 will be treated as if they were non-UK services.

Payments on account

• Under the revised 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.

The full government response can be found here: The Tax Treatment of Carried Interest - Government Response and Policy Update (June 2025) (Accessible) - GOV.UK 

The recent policy update on the taxation of carried interest is expected to be welcomed by many in the investment management industry. The Government's confirmation that no additional qualifying conditions will be introduced provides much-needed clarity around what constitutes “qualifying carried interest.” Furthermore, the introduction of statutory limitations on the territorial scope of the regime offers reassurance to non-UK investment managers, allowing them to perform services in the UK for short periods without triggering UK tax liabilities on their carried interest. Notably, the proposed changes to the income-based carried interest rules, particularly relevant for credit funds, could prove beneficial.  However, as always, the devil is in the detail – the practical implications of these changes will be clearer once draft legislation is released next month. 

Next steps  

Draft legislation is expected be published for technical consultation in July 2025. Final legislation will be introduced in the Finance Bill 2025–26. The Government will continue engaging with stakeholders to refine the technical aspects of the revised changes outlined above, with the first working group session expected to be held next week.  

We will be involved in these working groups and technical consultation and will release further insights in due course.  

If you have any questions, please do not hesitate to contact Terry Heatley or Ami Shah.