On 16 September 2025 at the occasion of Budget Day, the caretaking government presented new legislative proposals to increase the taxation of so-called lucrative interest. The lucrative interest regime applies to the taxation of financial interests which originate from for example carried interest schemes or management participation plans. Benefits from a lucrative interest yield substantial returns that are not proportionate to the investment or the risk incurred.
Background
Lucrative interests are generally taxed in Box 1 at progressive
rates of up to 49.5%. Alternatively, an individual taxpayer may
interpose a (holding) company in which they hold a substantial
interest (at least 5%). In such cases, income realized by the
interposed company may be exempt from corporate income tax under
the participation exemption rules. This structure, which is
commonly used in practice, is permitted only if at least 95% of the
lucrative interest income received by the holding company is
subsequently distributed to the taxpayer. In that event, taxation
takes place under Box 2 at a progressive rate of 31%, which is
considerably lower than the 49.5% rate applicable in Box 1.
The changes in the legislation were widely anticipated. The indirect structuring of the lucrative interest has been the subject of political debate for some time, as we wrote in our earlier alerts: Letter Secretary of State on Lucrative Interest Scheme and Public consultation on alternatives to the current lucrative interest regime.
Legislative proposal
The legislative proposal is closely aligned with earlier
parliamentary decision-making, which provides for the introduction
of a multiplier on indirectly held interests in order to align the
taxation of lucrative interest with the applicable rate of Box 3,
thereby increasing the overall tax burden. This alignment is
achieved by increasing the tax base of the benefit received, i.e.
by applying a multiplier of 36/31 on the benefit received by the
individual taxpayer. The legislative proposal is intended to take
effect as of 1 January 2026, without any exceptions or
grandfathering for existing (indirectly held) lucrative interest
arrangements.
Key takeaways
Given the number of motions previously adopted with broad
parliamentary support, it is highly likely that the legislative
proposal will be enacted and enter into force on 1 January 2026.
Private equity managers should therefore carefully review their
participations and assess whether any action should or could be
taken before year-end. In light of the anticipated increase in the
taxation of carried interest, it may be prudent to consider
alternative instruments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
