Legal Bulletin: New UK Tax Rules for Carried Interest

The UK government recently announced significant changes to the taxation of carried interest, the earliest of which is planned to come into effect from 6 April 2025

The UK government recently announced significant changes to the taxation of carried interest, the earliest of which is planned to come into effect from 6 April 2025. These changes, introduced as part of the Autumn Budget 2024, aim to ensure that the tax treatment of carried interest, a performance-related reward received by fund managers, properly reflects its economic characteristics and provides a fairer and more stable tax regime while recognising the UK’s position as a leading asset management hub. 

The current rate of Capital Gains Tax (CGT) on carried interest, which is 28%, will be consolidated into a single rate of 32% from 6 April 2025. For additional rate taxpayers, this 4% increase tracks the increase to standard CGT rates announced in the Autumn Budget.

From 6 April 2026, the Government proposes to introduce more significant changes. Under current proposals, carried interest will be subject to a revised regime within the income tax framework. This change aims to align the tax treatment of carried interest more closely with other forms of income, ensuring consistency and fairness in the tax system. This regime will sit alongside the existing Disguised Investment Management Fee (DIMF) and Income-Based Carried Interest (IBCI) rules.

The new income tax regime for carried interest will apply broadly to all carried interest received by fund managers from 6 April 2026. Under the new rules if enacted carried interest will be taxed at the individual’s marginal income tax rate, which could be as high as 45% for additional rate taxpayers and class 4 self-employed NICs will also be payable - a default tax rate of 47% for additional rate taxpayers. This represents a significant increase from the current CGT rates, aligning the tax treatment of carried interest with other forms of earned income (but see below regarding qualifying carried interest).

However, qualifying carried interest will be subject to a 72.5% multiplier, effectively reducing the aggregate effective tax rate to approximately 34.1%. This relief is designed to recognize the long-term nature of investments and the performance-related aspect of carried interest. A limited number of deductions will be allowed when calculating the taxable amount of carried interest. These deductions will include certain expenses directly related to the earning of carried interest.

The Government will introduce modified IBCI rules to determine what constitutes qualifying carried interest. This includes abolishing the exclusion from the IBCI rules for those who are granted carried interest as employees. Additional conditions, such as satisfying a minimum GP commitment and a “lock up” test, will be considered for the carried interest to be deemed “qualifying”. Consultation on these aspects is currently ongoing. 

The Government has confirmed that it does not consider it appropriate to exclude existing fund structures from the new regime. However, transitional measures may be introduced in relation to the conditions for qualifying carried interest to ease the shift from the CGT regime to the new income tax framework. If introduced, these measures could help mitigate the tax impact on fund managers during the relevant transition period. 

The Government has launched a consultation to gather feedback on the proposed qualifying conditions and to ensure the relief supports the competitiveness of the UK’s asset management sector. The final details of the relief and qualifying conditions will be published following the consultation, with draft legislation expected in 2025. An extended consultation period is welcome, however, it is not expected that the main aspects of the proposed new tax regime will change significantly. 

Approximately 3,100 individuals working in the UK investment management industry who receive carried interest will be impacted by these changes. These individuals will need to be aware of the new CGT rate and the upcoming transition to an Income Tax framework to ensure compliance with the new rules.  

Private equity houses and fund managers receiving, or expecting to receive, carried interest should review their circumstances in light of these changes including non-UK residents who work, or have worked, in the UK. It is advisable to consult with tax professionals at an early stage to understand the implications of the new rules and ensure compliance. For further details, please refer to the Shoosmiths Tax team or your usual contact at Shoosmiths LLP