Following the Government's announcement of proposals to reform the tax treatment of carried interest, HMRC have published the summary of responses for their call for evidence on 'The Tax Treatment of Carried Interest' and detail of 'Next steps' which include the publication of a new consultation to consider the qualifying conditions.
Carried interest is a performance-related reward fund managers receive, primarily within the private equity industry. It has favourable terms being taxed under Capital Gains Tax (CGT) rates of 18% and 28%, rather than under the Income Tax regime.
The Government is committed to taking action to ensure that the tax regime appropriately reflects the economic characteristics of the reward.
- In July 2024, the Chancellor Rachel Reeves, issued a Call for Evidence on 'The tax treatment of carried interest'
- The Call for Evidence requested that stakeholders engage on the economic characteristics of carried interest, different structures and market practices.
- In the Autumn Budget 2024, the Chancellor issued a summary of responses and announced proposals to reform the tax treatment of carried interest.
- From April 2026 all carried interest will be treated as trading profits and subject to Income Tax and Class 4 National Insurance Contributions (NICs). Draft legislation will be published in 2025.
- In the interim, the CGT rates for carried interest will increase to 32% from 6 April 2025.
- The Government has also launched a consultation on the conditions for carried interest to be treated as qualifying.
The Call for Evidence received over 100 responses. Overall respondents:
- Emphasised the importance of ensuring the regime supports the competitiveness of the UK’s asset management sector, by offering bespoke tax rules for carried interest.
- Expressed a preference for a simple, principles-based regime, rather than prescriptive rules.
Reform the tax treatment of carried interest
- Carried interest will be subject to tax as profits of a deemed trade, with special computational rules for qualifying carried interest. The chargeable amount will be the sum of:
- Carried interest less a limited number of permitted deductions, plus
- Consideration received on a disposal of a right to carried interest.
- Qualifying carried interest will be multiplied by 72.5% to calculate the chargeable amount.
- Carried interest will be qualified where it is not the Income Based Carried Interest (IBCI). Further qualifying conditions will be introduced into IBCI rules.
- In addition to the existing average holding period test, the government will consult on policy options for introducing further conditions.
- The new regime will sit alongside the existing Disguised Investment Management Fee (DIMF) rules and will apply where carried interest arises under arrangements in which the individual performs investment management services.
- Similar anti-avoidance rules as those under the current regime will be incorporated into the revised regime.
Territorial scope & the new Foreign Income and Gains (FIG) regime.
- The deemed trade will be treated as carried on in the UK to the extent that the investment management services under which the carried interest arose were performed in the UK.
- Non-UK residents will be subject to Income Tax to the extent that the carried interest relates to services performed in the UK. This mirrors the approach in the DIMF rules.
- From April 2025, the remittance basis of taxation will be replaced by a new Foreign Income and Gains (FIG) regime.
- Qualifying carried interest that relates to non-UK services will benefit from relief under the FIG regime. Non-qualifying carried interest subject to the IBCI rules will continue to be subject to the same provisions.
Removal of ERS exclusion
- The IBCI rules currently contain an exclusion for carried interest that arises under Employment-Related Security (ERS) rules.
- As a result, the application of the IBCI rules is limited to fund managers who are self-employed.
- The government will remove this exclusion, ensuring the IBCI rules apply fairly to all fund managers who receive carried interest. The ERS rules will continue to apply in the same way for awards of carried interest to employees.
- Targeted amendments will be made to ensure the rules work appropriately for private credit funds.
Working Group
- The Government intends to establish a working group with stakeholders to explore points of technical detail in connection with the policy set out in this chapter ahead of the publication of draft legislation in 2025.
- Stakeholders with relevant technical expertise who wish to join the working group should email
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Qualifying Conditions: a new consultation
A key aspect is to the taxation of carried interest is consideration as to what qualifying conditions should apply. this new consultation considers an aggregate minimum co-investment condition and minimum holding period condition.
Aggregate minimum co-investment condition
- Often fund managers are expected to make a substantial co-investment. This condition would limit the qualifying carried interest treatment to fund managers exposed to a material amount of risk.
- There are a number of practical challenges with implementing this condition. The government invites views on:
- How to define the ‘fund’ for the purposes of any new condition,
- The minimum levels of co-investment required.
- What types of co-investment arrangements would count to meet the condition.
- The time during which the condition must be satisfied.
- Transitional arrangements.
- If there are further risks and/or wider considerations that should be highlighted in this context.
Minimum holding period for carried interest rights condition
- This condition would require fund managers to have held their carried interest rights for a minimum period before the receipt of carried interest for it to be treated as qualifying.
- The condition aims to reflect the fact that fund managers are expected to wait a substantial period before they receive carried interest and there is a risk that they will never get it.
- The government invites views on the merits and design of the condition and whether the decision not to introduce transactional arrangements has any unintended consequences.
The consultation closes on 31 January 2025. Responses may be sent by e-mail,
Consultation questions
- Recognising the challenges in this area, how might any team-level co-investment requirement be most successfully constructed?
- Are there any further risks and/or wider considerations, beyond those identified via the call for evidence, that should inform decisions on whether the government progresses with a co-investment requirement?
- How might the length of any new time-based condition best be designed to reflect the nature of carried interest rewards?
- Do you foresee any unintended adverse consequences for fund managers in existing funds from a government decision not to introduce transitional arrangements of a condition of this kind?
Useful guides on this topic
Carried interest
What is carried interest? When does carried interest arise? How is carried interest taxed?
Capital Gains Tax (CGT) Autumn Budget 2024 (Subscriber Update)
The Chancellor, Rachel Reeves, in her Autumn 2024 Budget announced an increase in the lower and higher CGT rates to 18% and 24% respectively, an increase in Business Asset Disposal Relief (BADR) and Investors’ Relief (IR) to 14% from April 2025 and 18% from April 2026 and an increase in the CGT rate on carried interest to 32% before transitioning to full Income Tax treatment in 2026.
National Insurance: Rates
What are the current National Insurance rates? What rates will apply to next year?
Disguised investment management fees
This guide looks at changes in the taxation of investment managers' fees. Due to a long-running tax concession agreed by HMRC and the British Venture Capital Association, carried interest is subject only to Capital Gains Tax. Amidst some concern that management fees are being disguised as carried interest, the Government introduced legislation that ensures that management fees are subject to Income Tax.
Non-Domiciles tax reform: At a glance
From 6 April 2025, the UK is removing the concept of domicile status from the tax system and will implement a new residence-based regime
Employee Shares: the Employment-Related Securities rules
What are the tax consequences when a company gives shares to an employee or director? What are employment-related securities? What is best: shares or share options? How do you set up a share scheme?
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