Carried Interest

The UK’s tax regime for carried interest has been in force since 6 April 2026. It was introduced following several years of intense engagement by UK Private Capital (formerly BVCA) and other stakeholders with the Government and politicians. Under this regime, carried interest is subject to tax at an effective rate of around 34.1%. The Government chose this rate having listened to information and feedback from the industry concerning the unique nature of carried interest, and the role it plays in UK growth and competitiveness.
 

Background to the current regime

At the October Budget of 2024, the Government announced that the tax treatment of carried interest would be reformed. As a first step, the rate of tax increased in April 2025 from 28% to 32%. Then, in April 2026, the new regime came into full effect. This involved a further increase to an effective rate of around 34.1%, combined with a fundamental shift from taxing carried interest as a capital gain, to bringing it within the income tax framework as a deemed trading profit. 

UK Private Capital engaged closely with the Government at every stage of these reforms, to ensure that the impact of the changes on the industry was understood by all relevant policy-makers. This included providing detailed information about the international scope of the new regime, challenges associated with the income based carried interest (“IBCI”) rules, and the application to carried interest of the rules on payments on account. 

On 5 June 2025, following UK Private Capital engagement, the Government published an update announcing the introduction of limitations to the territorial scope of the rules. This was a welcome development permitting normal business travel to the UK to continue without a perceived risk of creating unexpected tax charges. While there are still uncertainties in this area, the limitations and clarifications introduced by the Government in response to industry feedback have significantly reduced the number of non-UK resident managers for whom the position remains unclear. The UK Private Capital Tax Committee has produced a high-level flowchart to assist non-UK resident members to understand the questions that will determine whether they have a UK tax liability under the new rules.

We continue to engage with HMRC and HM Treasury to ensure the system supports compliance, avoids unnecessary complexity, and preserves the UK’s competitiveness as a hub for private capital. This includes continued engagement with HMRC as they develop guidance on the new regime.
 

UK Private Capital response to the draft legislation published in July 2025

On 21 July 2025, the Government published draft legislation to implement the reforms, inviting views from stakeholders. UK Private Capital submitted its response on 15 September 2025. While we recognised that the Government was seeking a balanced outcome, we highlighted that the UK would have one of the highest rates of tax on carried interest among key competitor jurisdictions. This means that, if the UK is to maintain its position as a global hub for private capital, it is critical that the tax rules for carried interest are workable, provide clear outcomes, and are stable in the long term.

Areas covered in our response to the draft legislation included: 

• Double taxation – It must be clear that managers will only pay tax on their carried interest once, and that other provisions of the tax code will not create a possible double charge. 
• Territorial scope – The rules applying to internationally mobile individuals must be proportionate and practical, avoiding outcomes that could deter global talent from coming to the UK to work and invest.
• Average holding periods (formerly the “IBCI” rules) – While the draft reflects some industry concerns, material issues must still be addressed, particularly for venture capital funds, credit funds and funds of funds. 
• Compliance – We highlighted the administrative burden the regime may create for individuals, and suggested mechanisms to streamline compliance.
   

Consultation on the taxation of carried interest of October 2024: proposed new conditions

In October 2024, alongside the announcement of the reforms to the tax treatment of carried interest, the Government launched a consultation inviting comment on the introduction of two potential new conditions for eligibility for the carried interest regime. The two proposed conditions were a minimum level of team co-investment, and a minimum holding period for which individuals would have to hold their right to carried interest before receiving it.

UK Private Capital’s response explained the impacts of the proposed new conditions and argued that neither condition was required. On 5 June 2025, the Government published an update announcing that neither of the proposed new conditions would be introduced. We welcomed this move as it provided much-needed certainty for the industry, and reflected the constructive engagement between industry stakeholders and Government officials over the preceding months.
 

Call for evidence on the taxation of carried interest of July 2024

In July 2024 the Government published a call for evidence on the tax treatment of carried interest, inviting views from stakeholders on its plans for reform. Our response reflected an extensive consultation with our members and in-depth research on the tax treatment of carried interest in other jurisdictions. Our response emphasised that:

• the private capital industry makes a significant contribution to the UK economy
• the tax treatment of carried interest is important in attracting and retaining talent in the UK
• UK-based managers are more likely to invest in the UK
• changes should be forward-looking, and
• there should be full consultation on the detail of any changes.
   

Carried interest election to assist with double tax relief claims

A new election was introduced for tax years 2022-23 onwards, to allow UK resident investment managers to accelerate their tax liability relating to carried interest. This is to assist them to claim double tax relief in another jurisdiction (notably the US). This addresses an issue that arose following an update to HMRC guidance in January 2022, which meant that UK resident managers with tax liabilities in other countries could be subject to tax twice on the same carried interest entitlement, without being able to claim double tax relief. We worked closely with HM Treasury and HMRC on the election, which, although not a universal solution, may provide a resolution for many affected individuals. We published a Policy & Technical Alert in March 2023 containing more information on this issue.