The October 2024 budget caused considerable concern among fund managers and private equity professionals in the investment management industry that, from 6 April 2026 onwards, carried interest would cease to be taxable as chargeable gains but would instead fall to be taxed under the UK's income tax rules as trading profits, subject to both UK income tax and Class 4 NICs.
However, the Government proposed a concession – where carry met the definition of 'qualifying carried interest', only 72.5% would be subject to income tax and NICs, meaning an effective combined rate of income tax and Class 4 NICs of 34.1%.
Qualifying carried interest: initial concerns
The Government was considering whether to introduce two further requirements for carried interest to be treated as 'qualifying':
- A minimum co-investment requirement - which would require that executives co-invest a certain minimum amount into the funds that they manage.
- A minimum holding period of the individual - such that, in addition to the fund's minimum holding period, individual fund principals would have to hold their right to carried interest for a minimum time period before receiving carried interest returns.
Policy update and draft legislation
The Government undertook a consultation on the qualifying conditions with a range of individuals, businesses, advisory firms, representative bodies and academics. Lawyers from Withers LLP attended that consultation and put our clients' concerns directly to the Government on a no-names basis. On 5 June 2025, the Government provided a policy update which demonstrated that the Government listened to the legitimate concerns raised by these key stakeholders and their policy update confirmed that:
- the Government would not proceed with the introduction of a minimum co-investment requirement.
- the complexity associated with a minimum time period requirement would not be proportionate and so the Government would not be proceeding with a minimum holding period requirement.
This acknowledgement of the disproportionate complexity that these conditions would introduce was welcome.
However, stakeholders were left waiting for the draft legislation to confirm this position and provide finer details of the application of the rules.
On 21 July 2025, the Government published the draft legislation which confirmed this pragmatic change of direction.
Instead of focusing on individuals' holding periods, the qualifying status of carried interest now depends on the average holding period of the investment scheme itself by using a 'relevant proportion' concept as a multiplier, a welcome change:
| Average holding period | Relevant proportion |
| Less than 36 months | 0% |
| At least 36 months but less than 37 months | 20% |
| At least 37 months but less than 38 months | 40% |
| At least 38 months but less than 39 months | 60% |
| At least 39 months but less than 40 months | 80% |
| 40 months or more | 100% |
As can be seen, if the investment scheme's average holding period is less than 36 months the carried interest awarded and arising to the executive will not be qualifying since it would be Income-Based Carried Interest. But, if the investment scheme has a 40-month average holding period and the relevant proportion of the carry awarded to and arising to the executive as 'qualifying carried interest' will be 100%, ie all of the carry arising from the fund would be qualifying in the executive's hands and attract the 72.5% multiplier and effective 34.1% tax rate. The draft legislation goes on to detail how the average holding period is calculated depending on the focus of the investment fund, eg venture capital funds, equity stake funds, real estate funds and so on.
Internationally mobile individuals: a softer landing
A significant concern with the new regime was how non-UK tax residents would be treated, especially where carried interest arises after they have left the UK.
Under the UK capital gains tax ('CGT') rules, non-resident individuals are not generally subject to CGT when the carry arises because non-UK tax residents are typically outside of the scope of CGT and most other investment returns in fund structures do not usually generate UK tax liabilities for non-UK tax residents (for examples, distributions, interest and returns of loan principal).
During the consultation, stakeholders raised a range of concerns about the territorial scope of the revised regime and how that would work in practice, with particular concerns around the risk of double taxation where a non-UK resident is taxed on carried interest in both their jurisdiction of residence and in the UK. Although the UK has a wide range of Double Taxation Agreements the policy update acknowledges that there may be uncertainties relating to other jurisdictions' approach to the application of Double Taxation Agreements.
In recognition of that uncertainty, the draft legislation introduces territorial rules to determine the location of an executive's trade. If the trade would be treated as carried on partly in the UK and partly outside the UK, only the carry associated with the UK located trade is relevant to the income tax calculation. The 'UK' carry is then apportioned further between UK 'workdays' and non-UK workdays.
The draft legislation introduces a special concept of workdays or the purposes of 'investment management services'.
Importantly, the following UK workdays are excluded from this apportionment:
- any UK workday prior to 30 October 2024;
- any UK workday in a 'non-UK tax year' – a year when the executive works fewer than 60 days in the UK and is otherwise non-UK resident for tax purposes; and
- any UK workday prior to a period of 3 or more non-UK tax years.
Interestingly, the new 60-day workday threshold for non-UK tax residents is more lenient that was expected. It had been anticipated that, if a non-UK tax resident individual performed investment management services in the UK there would need to be a just and reasonable apportionment between carry arising from UK and non-UK services with the income tax charged accordingly. The 60-day threshold provides a clear bright line test for non-UK tax resident individuals to ensure that they are not subject to UK income tax in respect of carried interest, which provides welcome certainty.
Conclusion: stability, for now?
The Government's consultation-led approach to changes to the taxation of carried interest, which are highly complex, have been positive and it is heartening to see the Government's willingness to engage with key investment management stakeholders. The concerns had been that the changes would give rise to a mass exodus of investment professionals. The policy evolution reflecting constructive engagement and a desire to maintain the UK as a competitive hub for the fund industry, are to be welcomed. Whether the final legislation will avoid unintended consequence remains to be seen, along with the reaction of the highly internationally mobile investment management industry, but at least these steps appear to be in the right direction and should serve to calm some of the uncertainty and rebuild trust in the UK as a stable, attractive jurisdiction for the industry.
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