Major portions of the U.S. tax code are scheduled to expire at the end of 2025, and as the U.S. tax landscape faces potential upheaval, private equity firms must stay vigilant and adaptable. Proactively engaging with tax advisors, reevaluating deal structures and lobbying for favorable policies will be critical to mitigating risks and seizing opportunities in this evolving environment.
Key Issues in Tax Policy
1. US Tax Treatment of Carried Interest
The specter of changes in the tax treatment of carried interest has long been a focal point of political debate in the United States. During his first presidential campaign, President Donald Trump had pledged to eliminate the preferential tax treatment of carried interest as a perceived “loophole” that benefits private equity sponsors. While he stopped short of full elimination, the Tax Cuts and Jobs Act (TCJA) extended the required holding period necessary to claim the reduced tax rate for long-term capital gains from one to three years for carried interest, a move that added complexity for private equity firms and their investors.
More recently, in February 2025, the Trump administration conveyed a continued interest in the taxation of carried interest. In discussions with Congressional Republican leaders who are negotiating the potential contours of a tax reconciliation package, further carried interest reform has featured prominently in the President’s top priorities. It remains uncertain at this stage, however, what format any such reform would take. Meanwhile, a group of Democratic lawmakers have reintroduced a proposal to adopt the Carried Interest Fairness Act, which would tax a sponsor’s share of realized capital gains in respect of carried interest at ordinary income tax rates.
Changes to Carried Interest Taxation in the UK
The tax treatment of carried interest is also being reconsidered outside of the United States. In October 2024, the newly elected U.K. government announced much-anticipated proposals to significantly alter the taxation of carried interest in the United Kingdom. The changes include an increase in the rate of tax that applies to carried interest capital gains, from 28% to 32%, which will apply for the 2025/2026 tax year only. From 2026 onward, carried interest will be taxed as regular trading income, generally subject to the recipient’s marginal rate of income tax and National Insurance in the U.K. (45% and 2%, respectively for the highest-rate taxpayers). So-called “qualifying carried interest” that meets certain conditions, which are yet to be fully articulated and remain subject to ongoing consultation, would be subject to a lower effective tax rate of 34.1% (for the highest-rate taxpayers). The proposal is for this to be achieved by subjecting only 72.5% of so-called qualifying carried interest amounts to income tax and National Insurance.
The proposed measures for 2026 onward are subject to consultation between now and April 2026, with an initial consultation period closing at the end of January 2025. Given the changes were included in a Labour Party pledge ahead of the U.K. General Election, the broad substance of the new regime seems unlikely to change. Rather, it will be the technical details that are subject to further refinement. Draft legislation is expected to be published in the coming months for further consultation. The legislation is not expected to include transitional measures for existing structures.
The territorial scope of the new U.K. carried interest regime also warrants attention. Under the proposed framework, carried interest arising to non-U.K. residents in respect of investment management services carried on in the U.K. may be taxed as profits derived from a deemed U.K. trade. The changes to the U.K. carried interest regime also coincide with the introduction of a new four-year Foreign Income and Gains (FIG) regime in April 2025, which replaces the U.K.’s existing “non-dom” rules. The new FIG regime provides full relief on eligible foreign income and gains for new U.K. residents, contingent on them not having been U.K. tax residents in the preceding 10 years. Qualifying carried interest from non-U.K. services may qualify for this relief.
As governments around the world are increasingly driven by populist politics, and look for ways to re-balance economic growth with fiscal responsibility coming out of the rapid spending and borrowing that policy-makers relied on during the post-COVID‑19 pandemic recovery period, revenue sources including carried interest are likely to remain part of the conversation in the U.S. and abroad.
2. Extension of the TCJA
At the end of 2025, significant portions of the landmark 2017 tax bill, the TCJA, are set to expire, including:
- Individual tax rate cuts
- The doubling of the estate tax exemption
- The Section 199A small business deduction1
- Tax rates on foreign income of certain U.S. corporations.
In addition, certain portions of the TCJA have already expired, but may make a comeback (potentially with retroactive effect):
- Improved deduction of business interest expense (deduction limitation based on earnings before interest and taxes (EBIT) rather than earnings before interest, taxes, depreciation and amortization (EBITDA))
- 100% bonus depreciation on certain depreciable assets and business equipment
- Enhanced amortization of research & development (R&D) expenditures.
President Trump has expressed a desire to make permanent the tax cuts under the TCJA that are set to expire, plus new proposals including:
- Reducing the corporate tax rate on domestic production and manufacturing.
- Changing the deductions for state and local taxes (SALT), including changes to the business SALT deduction.
- Exempting certain income from tax altogether, such as tips, overtime and social security benefits.
3. Inflation Reduction Act Revisions
During his campaign, President Trump vowed to eliminate parts or the entirety of the Inflation Reduction Act (IRA), including repealing substantially all of the IRA’s tax credits. While a wholesale repeal now seems unlikely, we can expect significant changes to the structure of some tax credits. This could impact investors who are currently leveraging these credits, including in renewable energy and sustainability-focused investments.
Some Republican lawmakers are also floating the possibility of limiting the deductibility of state and local taxes for corporations, and closing certain workarounds for the current SALT limitation for individuals.
Taken together, these policies could introduce variability in deal structuring. Risk could be especially significant for enterprises that rely on clean energy tax credits and incentives or have significant exposure to the cost of imports.
4. Global Tax Deal and Digital Service Taxes
The Trump administration have also expressed a strong interest in pushing back against the Organisation for Economic Co-operation and Development (OECD)-led global initiative to make multinational corporations pay an effective corporation tax rate of at least 15%. The initiative—referred to as Pillar II—is perceived by many Republican lawmakers as an unwarranted attack on U.S. taxing sovereignty. The initiation has become law in multiple jurisdictions and—but for a safe harbor expected to provide some relief solely in 2025—is likely to have an increasingly negative effect on U.S. multinationals relatively soon. Similarly, the Trump administration has announced that it will seek to push back against so-called digital service taxes that many high-tax jurisdictions have adopted, arguing that those are disproportionately borne by U.S. multinationals.
The U.S. Department of the Treasury is expected to provide an overview of potential measures and countermeasures that could be used in this context. It remains to be seen how the Trump administration will utilize any of the options presented. The uncertainty about the international tax climate is, however, almost certainly to have an impact on valuations. Buyers and sellers should also spend attention as to how these risks are allocated in transaction documents.
Strategic Considerations for Private Equity in Light of Potential Tax Changes
Given the foregoing potential changes to tax policies, private equity firms should focus on the following to mitigate risks and capitalize on new opportunities:
- Consider the impact of international tax reform on the stock price of multinational corporations.
- Revisit fund documents to anticipate the possibility of potential carried interest changes.
- Assess how lower corporate tax rates on domestic production might influence deal valuations and exit strategies.
- Explore tax-advantaged structures to preserve after-tax returns for investors.
- Evaluate the effects of the Section 199A deduction expiration on portfolio companies structured as operating flow-through entities.
- Assess existing investments that rely on IRA tax credits and explore strategies to minimize risk and align with the revised tax credit structure.
- Monitor changes to SALT deductions and individual tax rate changes, which could impact portfolio companies and fund executives and investors in high-tax states, like New York.
1 Although we see some lobbying efforts to include investment professionals in the fairly narrow carve-out if the deduction is extended, the chances of this carveout succeeding are relatively small.
