George Merrylees
- Partner
- Private Client
Private equity and carried interest: preparing for the new rules
The Autumn Budget of 2024 was a watershed moment in the taxation of carried interest (also referred to as “carry”), taking it out of the capital gains tax (CGT) regime and placing it within the income tax regime from 6 April 2026. In this article, we set out the changes and their practical implications.
Wider context
Carried interest is a share of profits from an investment that is paid to investment managers and general partners in private equity, venture capital, or hedge funds. It is a performance fee that is paid out to fund managers through a share of the profits after a fund has reached a certain return.
The taxation of carried interest has developed differently in each jurisdiction in response to tax policy, regulatory, and market factors.
In the UK, to understand carried interest, it is necessary to go back to the 1980s when the taxation of carried interest was clarified between the British Private Equity & Venture Capital Association (BVCA) and the then Inland Revenue. The private equity and venture capital markets were still emerging sectors, and it was important for the UK to attract such business. For that reason, and to reflect the entrepreneurial risk, carried interest was taxed as capital gains rather than income.
Since then, this capital treatment has been slowly eroded, firstly with DIMF (Disguised Investment Management Fee) and secondly with IBCI (Income-Based Carried Interest), both introduced shortly before Brexit. These regimes denied income treatment for fees that were effectively disguised management fees, or where the underlying fund assets were held for less than 40 months.
The reforms to carried interest
From 6 April 2025, the CGT rate applicable to carried interest subject to CGT increased from 28% to a flat rate of 32%. Carried interest remains within the CGT regime for this tax year 2025/2026.
From 6 April 2026, carried interest will be treated as income and subject to income tax and Class 4 national insurance contributions (NICs). It will benefit from a multiplier of 72.5 %, with only that portion treated as taxable. In other words, 27.5% is discounted and not taxed. For an additional rate taxpayer, this translates to an effective tax rate of approximately 34.1% on qualifying carried interest, compared to the current flat CGT rate of 32%, and 28% prior to 6 April 2025.
What if I am non-UK resident?
As carried interest will be treated as income, it will affect how double tax treaties apply. This could reduce the relief for foreign tax available.
To counter this, the UK’s new rules avoid non-UK residents being taxed on short UK visits. If the fund manager worked in the UK for over three hours on fewer than 60 days, no UK income tax applies. As an additional exception, no UK income tax will apply, if a person:
- was non-UK resident for three consecutive tax years before the carried interest arose; and
- they had worked for fewer than 60 days in each of those three years.
Outside of these exceptions, work done in the UK will be subject to income tax. There are separate rules for NICs which should be examined separately.
What if I left the UK but plan to return?
The ‘temporary non-residence’ rules provide that if a person is UK resident for at least four of the previous seven tax years before leaving the UK. and then is only non-UK resident for five tax years or less, certain income and gains are taxed in the UK in the year the person returns to the UK.
These rules will apply to carried interest.
Therefore, carried interest arising before 6 April 2026 during a period of non-residence could be subject to income tax if a person returns too soon after 6 April 2026.
Conclusion
With sweeping changes to the taxation of carried interest taking effect from 6 April 2026, private equity executives face a critical juncture. Whether remaining in the UK or exploring more favourable regimes abroad, the new rules introduce complexity around income classification, international tax relief, and residence status. The implications are far-reaching — not only for personal tax positions but also for fund structuring and operational strategy.
Early tailored advice is essential. Executives should act now to assess their exposure, optimise their position, and avoid the pitfalls that come with cross-border tax planning. The window for proactive planning is narrowing and the cost of inaction could be significant.
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.
Meet the team:
Andrew McIntyre
- Senior Associate
- Private Client