Key takeaways

The main points are:

• Carried interest will be taxed as trading profits, regardless of source, subject to the multiplier where applicable.
• Employees and non-employees (e.g., partners) will be taxed under the same regime, although employees can still be liable under the employment-related securities rules.
• No minimum co-investment requirement will apply.
• No minimum holding period will apply for the holder of the carried interest rights. However, the existing average holding period requirement for the fund assets of at least 40 months under the income-based carried interest (IBCI) rules will remain.
• Non-resident individuals working in the UK can be subject to UK income tax on carried interest, subject to certain exemptions. These exemptions may be more generous than might have been expected, allowing a certain level of working time in the UK without triggering UK income tax on carried interest.
• Given the decision not to add minimum co-investment or holding period conditions and the benefit of the multiplier, carried interest is still expected to remain the incentive of choice to align management’s interest with that of the fund and so we do not expect any wholesale revision of compensation structures.
• Where practical issues arise tends to be where the treatment of carried interest proves a catalyst for individuals to raise wider grievances, usually coinciding with their exit from the business. Care then needs to be taken when resolving such disputes both from a legal (potentially employment law) perspective as well as a tax perspective.

In depth

The revised regime will apply to carried interest arising on or after 6 April 2026, i.e., there is no grandfathering for carried interest granted before that date. The terms of the new regime include:

• Any receipts meeting the definition of carried interest will be taxed as trading profits. This is intended to catch both capital and income receipts and so it should make it easier to assess the tax treatment without needing to investigate the original source(s) of the funds. This should simplify the UK reporting of carried interest receipts going forward.
• ‘Qualifying’ carried interest will be subject to a 72.5% multiplier – which means that 72.5% of ‘qualifying’ carried interest would be taxed at the additional rate of income tax of 45%, plus NICs at the rate of 2%. This effectively takes the combined tax and NICs rate to 34.075% for additional rate taxpayers. Arguably, this is not a significant increase from the previous 28% rate that applied up to 5 April 2025 (and the current rate of 32%, which has applied from 6 April 2025), particularly given the 4% increase in the higher rate of capital gains tax to 24% from 30 October 2024.
• Even if a receipt meets the definition of ‘qualifying’ carried interest, it could still be taxed as employment income under the employment-related securities rules. In practice, this means that s.431 elections remain important for employees and the impact of these rules will need to be considered for non-residents who move to the UK with existing carried interest. Other employment-related securities charges should be also considered (e.g., if making any changes to a corporate structure).
• The existing exemption from the IBCI rules for employment-related securities will be removed. This means that the average holding period of the relevant fund investments must be at least 40 months for both employees and non-employees in order for the carried interest to be ‘qualifying’.
• The government decided against implementing additional requirements for carried interest to be ‘qualifying’. They had been considering a minimum co-investment requirement and a minimum holding period for carried interest rights. Based on the feedback received during the consultation, they decided that these requirements would add complexity and that the average holding period for the fund investments under the IBCI rules is sufficient, subject to certain amendments for certain strategies namely credit funds (as to which see below). This will be welcomed by the industry and shows that the government was willing to listen during the consultation.
• It was recognised that the removal of the existing employment related securities exemption under the IBCI rules would disproportionately affect credit funds. This is due to the way in which the average holding period is calculated with respect to the relevant investments of a fund. It was difficult in practice for credit funds to have an average holding period of at least 40 months due to the ways in which their strategies are implemented, notwithstanding certain narrowly drafted relaxations to those rules that were designed specifically for credit funds. Those narrowly drafted relaxations will be extended and new investment and divestment conditions will be introduced, to better enable credit funds to satisfy the average holding period requirement.
• Moving from the capital gains tax regime into the income tax regime, as profits from a trade, extends the territorial scope with respect to carried interest receipts. As a consequence, non-UK tax residents may be subject to UK tax on carried interest receipts from 6 April 2026. This extension of the territorial scope is subject to the following exclusions for non-UK tax residents:
  • Profits attributable to all duties performed in the UK prior to 30 October 2024 (effectively grandfathering any UK duties prior to last year’s budget) will not be taxable;
  • Profits attributable to any services performed in a tax year where the individual is non-UK tax resident and spends less than 60 workdays in the UK in the relevant tax year will not be taxable; and
  • Profits attributable to any UK duties will be treated as being attributable to non-UK duties if (i) the individual has been non-UK tax resident for at least three tax years before the carried interest arises, and (ii) in each such tax year they worked in the UK for fewer than 60 workdays.
• These exclusions are helpful for non-UK tax resident carried interest holders that fall within them. These are more generous than might have been expected, but may have limited assistance in practice if non-resident individuals are limited to a lower number of UK workdays for statutory residence purposes. Notwithstanding the potential interaction with the statutory residence test, the arguably generous new de-minimus threshold may enable a more seamless transition period for those funds that have experienced a movement of key personnel from the UK following the recent tax changes (including the “non-dom” changes effective 6 April 2025), with looser controls being placed on the number of return trips being taken by those departees.
• For those non-UK tax resident carried interest holders that fall outside of the exclusions, the position may be complex if any part of their receipt is taxed as carried interest. In such a case a double tax treaty may provide protection from double taxation. However, the UK’s classification of carried interest as profits from a trade may give rise to a mismatch in the classification of the receipt as between the UK and the other jurisdiction, which risks complicating a claim for relief pursuant to that double tax agreement. Such situations will require consideration on a case-by-case basis.
• We do not expect a wholescale rewrite of compensation practices due to the change in tax treatment, but we do see carried interest discussions arise in certain circumstances, particularly in relation to leavers. This may be a negotiation as to whether an individual will be a ‘good’ or ‘bad’ leaver or whether any clawback will be applied. These are usually sensitive discussions that requires a knowledge of employment law and/or dispute resolution as well as understanding of the tax implications. We expect to continue to see those discussion points arise following these changes.
• The draft legislation remains subject to consultation until 15 September 2025 and is intended to be included in the Finance Bill 2025-26.

Please contact us, or your regular Baker McKenzie contact, if you have any questions or would like to discuss further.