Carried Interest Taxation

The measure

With effect from 6 April 2025, the capital gains tax rate for carried interest  will increase to 32% (a 4% increase, from 28%, for additional rate taxpayers).   

Other than the rate change, the existing capital gains regime will apply until 5 April 2026, after which new wider reforms to the tax treatment of carried interest will come into effect. 

New revised tax regime 

From 6 April 2026, the Chancellor intends to tax carried interest under a new regime. The stated intention is to ensure “that the tax treatment of carried interest properly reflects its economic characteristics, putting the UK’s tax regime on a fairer and more stable footing for the long term, while recognising the unique characteristics of the reward and protecting the UK’s position as a world-leading asset management hub”. 

The main features of the new regime are expected to: 

• tax carried interest as deemed trading income, subject to Income Tax and Class 4 National Insurance Contributions from 6 April 2026 onwards;
• provide for a 27.5% discount to the amount of carried interest that is subject to the Income Tax charge where it is ‘qualifying’. For an additional rate taxpayer, this would create an effective tax rate (including NIC) of 34.075% for highest rate tax payers.
• no other tax charge will apply such that carried interest arising should not be subject to any other income or capital gains tax. 

Qualifying carried interest would broadly be carried interest:

• that meets the current definition of the term in the Disguised Investment Management Fee rules)
• that is not Income Based Carried Interest (“IBCI”)
• hat meets potential time-based conditions (i.e. the time between the carried interest being awarded and sums of carried interest arising) and co-invest conditions. These potential conditions are subject to consultation.  

Carried interest that does not meet the conditions to be qualifying carried interest will be taxed as income with no discount. 

The government  plans to extend the IBCI rules, which  t currently only apply to LLP members, to employees. The government have also noted that they will work with the industry to make targeted amendments to the IBCI rules in the context of private credit funds. 

Regarding timing of new rules, the government will consult on certain elements of the regime until  31 January 2025, with draft legislation expected later in 2025.  The government has indicated their commitment to consultation on any draft legislation in due course.   

Who will be affected?

Individuals who provide investment management services to investment funds and receive sums of carried interest.

When will the measure come into effect?

The capital gains rate change in respect to carried interest is due to affect sums of carried interest arising on/after 6 April 2025 until 5 April 2026.  

The new regime for taxation of carried interest is expected to affect sums of carried interest arising on/after 6 April 2026. Certain details of the regime are subject to consultation which will run until 31 January 2025.