New UK carried interest regime – draft legislation published

The government has today (21 July 2025) published draft legislation covering the new carried interest regime that will come into effect from 6 April 2026 (see Reform of the tax treatment of carried interest - GOV.UK). The main points are summarised below.

Further detail

Non-UK tax residents – statutory limitations

Non-UK residents will be brought within the charge to UK tax on carried interest to the extent that their carried interest relates to services performed in the UK.

As previously announced, the draft legislation includes three statutory limitations applicable to non-UK residents which provide that the following will be treated as non-UK workdays:

• Any UK workdays prior to 30 October 2024 (regardless of whether or not the individual was UK resident at 30 October 2024);
• Any UK workdays in a tax year where the individual is non-UK resident and has less than 60 UK workdays;
• Any UK workdays prior to a period of three or more “non-UK tax years” (i.e. tax years in which the individual is non-UK resident and has less than 60 UK workdays).

For the purposes of these rules:

• An “applicable workday” is one in which the individual performs any investment management services
• A day is a “UK workday” where the individual spends more than 3 hours performing any investment management services in the UK.
• Investment management services performed by an individual in the course of travelling to or from the UK are assumed to be performed outside of the UK, even during the part of the journey in the UK.
• Travelling to or from the UK begins when the individual boards the relevant mode of transport and ends when they disembark.

The “relevant period” over which applicable workdays should be apportioned:

• begins with the first day on which the arrangements contained provision that contemplated carried interest may arise from the scheme; and
• ends with the last day on which a sum of carried interest arose to the individual from that scheme in the relevant tax year.

Whilst these measures will not eliminate the risk of double taxation entirely they are expected to make the rules more workable for many short-term visitors to the UK.

The rules provide more clarity over the sourcing period and, at first sight, this would appear helpful for those who make incremental or annual allocations of carried interest for example.

We would though note that there remain some areas of uncertainty, such as how an individual performing investment management services would create a Permanent Establishment for double tax treaty purposes.

Temporary non-UK residents

In addition, the draft legislation includes provisions where an individual was temporarily non-UK resident in the 2025/26 tax year or earlier. Where a carried interest gain accrued to the individual during a period of temporary non-residence, then the individual will be treated as carrying on a trade in the year they return with 72.5% of the gain being taxed as deemed trading income.

The IBCI rules (to be known as the Average Holding Period condition)

The IBCI rules, as they are currently known, will be referred to as the Average Holding Period (“AHP”) condition going forwards and will apply to both employees and LLP members.

The draft legislation includes a number amendments to the AHP condition, including:

• Direct lending funds: Removing the rule which currently treats carried interest arising from a direct lending fund as automatically failing the AHP condition unless an exemption applies.
• Bespoke credit fund provision: Introducing a new provision for credit funds which will deem debt investments, together with associated equity investments, as being made and disposed of at a specific time (the “T1/T2” rules). There are also some relaxations where a debt is repaid early.
• Fund of funds and secondaries: Replacing the existing rules with a single provision covering both strategies.
• Unwanted short-term investments: Amending the existing rules to apply to a wider range of scenarios where investments are disposed of within 12 months, the intention was not to hold the investment for longer and certain conditions are met (including the profit resulting from the disposal has no significant bearing on whether a sum of carried may arise).
• Scheme director condition: The scheme director condition will be replaced with a broader requirement for the fund to have relevant rights in relation to the investment. 
  
  

Other key points

Expanded definition of “investment scheme” – In line with the existing rules, investment scheme includes a “collective investment scheme” as defined in section 235 of FISMA 2000. However, the definition also extends to an AIF, within the meaning of regulation 3 of the Alternative Investment Fund Managers Regulation 2013.

Meaning of carried interest – The meaning of carried interest broadly mirrors the definitions under the existing Disguised Investment Management Fee (“DIMF”) rules.

In addition, “tax distributions” have now been included within the meaning of carried interest.

Permitted deductions – The amount of consideration in the form of money given by or on behalf of the individual wholly and exclusively for the entitlement to carried interest can be deducted from the amount treated as deemed trading income, less any amount of consideration deducted in an earlier year.

At this stage, the draft legislation does not appear to specify how the consideration should be apportioned between tax years in which carried interest arises.

Avoidance of double taxation – In order to avoid a double charge to tax, the individual may make a claim for one or more consequential adjustments in respect of UK tax paid including any employment tax charges on acquisition under the Employment Related Securities regime. Further, there would appear to be no time limitation to the ability to make a claim for such consequential adjustments.

Payments on account: There is no carve out for carried interest when calculating payments on account due for the following tax year. 

Webinar 

We are holding a webinar on Wednesday 23 July 2025 (16:00 to 16:45 BST) to talk through the draft legislation in more detail. Please feel free to register here.

Please speak with your usual Deloitte contact or any of the contacts below if you would like to discuss.