On June 5, 2025, the UK Government announced the result of their recent consultation process regarding their plans to bring carried interest within the income tax regime from April 2026, subject to an effective tax rate of 34.1%. Several significant modifications to the initial proposals have been made in response to industry feedback and the Government have also decided not to adopt either of the two additional conditions to access the reduced tax rate regime that were the key focus of the consultation exercise. The proposed introduction of measures to limit the regime’s international scope is of particular note; these developments are intended to balance fair taxation of UK-based activity with the UK’s competitiveness as a global asset management hub.
Below is a summary of the key developments and our initial assessment.
Background and Policy Direction
The UK Government has confirmed its intention to transition carried interest fully into the income tax regime from April 2026. However, following extensive engagement with the British Private Equity & Venture Capital Association (BVCA) and industry stakeholders, it is clear from this announcement that the Government now intends to adopt a measured approach in its design of the new rules, acknowledging the need for long-term certainty and international competitiveness.
Key Developments
1. No Additional Conditions Introduced
The Government will not proceed with imposing either of the two additional requirements to access the beneficial 34.1% effective tax rate regime for carry that had been under consultation, these being:
- a mandatory co-investment requirement; and/or
- a new minimum holding period for carried interest.
This shows a recognition that the move towards taxing carried interest as trading income, if combined with these measures, would have resulted in a regime that was significantly more burdensome than competitor regimes. This decision will be welcomed by market participants.
2. IBCI Regime Changes
The intention to remove the exclusion for ‘employment related securities’ from the existing Income-Based Carried Interest (IBCI) rules post-April 2026 has been confirmed. However, several technical adjustments are expected to be introduced to modernise the IBCI rules, to make them fit for purpose in the current commercial environment. This will be particularly important as more fund managers will fall within scope of these rules and meeting the tests in these rules, which look to the average holding period of assets of a fund being over 36-40 months, will form a gateway to being able to access the beneficial 34.1% rate regime. Private credit, secondaries, and fund-of-funds were facing significant operational challenges in this area and have been referenced as key areas for reform, with some specific changes already announced. We await further details of the proposed changes with interest.
3. Territorial Limitations to Scope
This has been an area of particular concern to the industry following the original announcement of the intention to tax carried interest as a form of deemed trading income, rather than as investment income and gains. While non-UK residents may still be subject to UK tax on carried interest relating to UK-based services, the Government plans to introduce three statutory limitations in this area, in response to industry feedback on this topic:
- 60-Day Threshold: Non-UK residents will not be within scope unless they spend more than 60 ‘workdays’ in a year in the UK.
- Three-Year Tail: Carried interest received more than three full tax years after an individual was last UK-resident (or exceeded the 60-day threshold) will be excluded.
- Prospective Application: Only UK services performed after 31 October 2024, will be within scope.
These measures should offer meaningful relief and reassurance to internationally mobile executives, although they introduce some technical complexity. While risks of double taxation remain, the Government has shown an awareness of these concerns and appears to be open to ongoing industry engagement.
4. Application of Payments on Account
Despite industry objections, the Government has confirmed that carried interest will fall within the existing “payments on account” regime, which requires installments of estimated tax to be paid in advance of the usual self-assessment deadline, based on prior year profits. Although many carried interest payments are unpredictable and so vary significantly year to year, the Government considers that other forms of variable income already face this potential issue and, as such, does not believe a different treatment for carried interest is merited. It has pointed to the existing ability of taxpayers to reduce or cancel payments where overpayment risks exist.
Our Assessment
While the reforms still increase the overall tax burden on carried interest, this new position reflects significant progress from earlier proposals. The removal of the additional conditions, the introduction of clearer territorial limits, and the transitional protection for pre-October 2024 services should help limit disruption and support long-term planning.
Firms with UK operations or internationally mobile executives should continue to evaluate their structures and residency patterns, as well as internal operational changes that may be required in order to comply with the new regime, in anticipation of the April 2026 changes.
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