UK carried interest tax regime – Finance Bill 2026

In late October of 2024 the UK Government announced its plans to bring carried interest within the income tax regime from April 2026, to be taxed as deemed trading income, subject to an effective tax rate of 34.1%. The intervening months have seen draft legislation published and HMRC engaging with feedback from the industry on areas in need of improvement. 

We can now see the results of these efforts, as revised legislation has been published in the Finance Bill 2026. This revised legislation contains several significant modifications to the initial draft legislation. We have set out in this alert a summary of some of the key changes that have been made and our initial assessment of these.

Key Developments

1. Exclusive Charge to tax 

One of the key features of the new regime, which was billed as a simplification to the prior rules, was the idea that the new income tax charge would be the only UK tax charge levied on carried interest. The draft legislation in this area, as regards income tax charges, did not clearly achieve this goal. In particular: (i) in circumstances where underlying tax charges (on underlying fund profits) might arise prior to the new carried interest tax charges being due (for example, for carry held in a retention account); and (ii) where carried interest profits from a fund arose to someone other than the executive (e.g. personal holding structures).   

The revised legislation contains various helpful amendments aimed at rectifying these issues. It is notable, however, that the drafting retains the ability for HMRC to levy tax at the time the carried interest is awarded, if it has a value at that time, either under the employment tax regime ‘or otherwise’. This is not surprising given the spate of recent cases where HMRC has sought, with some success, to argue that valuable partnership interests, such as carried interest, when awarded to self-employed persons (such as LLP members) could be taxed as ‘miscellaneous income’ on grant. 

It also remains the case under the revised legislation that, where a different person (other than the individual executive) has suffered UK tax in respect of the carried interest, then the individual executive is able to make a claim to reduce the profits that are subject to tax under the new regime, but the relief is not automatic. HMRC’s position on this is not spelt out in detail but in these circumstances it seems likely that the final amount of tax paid would be the higher of the tax rate applicable to that other person (e.g. on their share of the underlying profits under “normal” UK tax principles) and the new tax charge under the carry tax regime. 

2. Average Holding Period (AHP) Regime Changes

The AHP rules determine whether or not carry is ‘qualifying’ under the new regime and form a gateway to being able to access the beneficial 34.1% rate regime. These rules look to the average holding period of assets of a fund, with an AHP of 36 months or more giving partial access to the preferential rate and of 40 months or more giving full access.

Private credit, secondaries, and fund-of-funds faced significant operational challenges in this area in past iterations of these rules. As such these had been referenced as key areas for reform, with some specific changes already announced.  The Finance Bill makes further helpful amendments to the regime in response to industry feedback. 

Notably, in the credit space. non-debt funds can now benefit from some of the improvements relating to how debt investments are treated (including in respect of the calculation of the AHP of debt investments), and debt for equity swaps and restructurings are better catered for. In addition, in the specific rules for credit funds, all arrangements deemed to be loan relationships for tax purposes are now covered (such as alternative finance arrangements, repos and manufactured interest relationships). These changes should mean that funds, and credit funds in particular, are more likely to be able to satisfy the AHP requirements to access the beneficial tax rate applying to qualifying carry.

For fund of funds, in order to qualify into this category at least 80% of the fund’s capital must be invested into certain types of investment (broadly, investments into funds or acquisitions of portfolios of investments). The investments that qualify have now been extended to include direct co-investments, defined as investments ‘alongside’ another (independent) investment scheme in which the fund of funds has invested. The condition that the fund should be a ‘qualifying fund’ and meet certain ownership tests has also been removed. Again, these changes should be beneficial for the industry.

Real estate funds will be relieved that the proposed amendments, aimed at covering funds which invest into non-UK land have now been rectified so that they cover long leases as well as freeholds. 

Further, very welcome, changes have been made to the ‘conditionally qualifying carried interest’ rules. These rules apply when carry arises at a time when a fund’s AHP is below 40 months and enable an executive to claim the lower tax rate if it is reasonable to take the view that, over the life of the fund, the AHP would be over 40 months. These rules can now be used for the first 10 years (rather than 4 years) of a fund’s life for funds with NAV based carry aligning the position with that for funds with realisation based carry. There has also been a change so that if these rules cease to apply and the higher tax rate is in fact due, the impacted carry is treated as arising at that time (rather than when it originally arose). This could impact the tax rate applicable to such carried interest, but is helpful in that it reduces the prospect of significant late payment interest being charged in respect of the underpayment of the tax due. 

Other changes in this area include changes to refine the rules that allow ‘tax distributions’ to be ignored in computing the AHP. This now recognises that tax distributions might be based on assumed tax rates and arise in advance of the tax being paid. 

The rules on ‘unwanted short term investments’ have also been significantly improved. These investments can be ignored in computing the fund’s AHP and some key restrictions making these rules difficult to rely on have been removed. There is no longer a requirement to on-sell the unwanted investments within 12 months (although the settled intention to do so remains a condition); as such an unexpected delay in the sale of an unwanted short term investment should not prejudice the fund’s ability to ignore such investment in when computing its AHP.  Further, the condition that unwanted short term investments comprise less than 25% of the capital invested by the scheme over its life has also been removed. However, there is still a requirement that they have no significant bearing on the amount of carried interest that arises and HMRC guidance as regards acceptable scenarios in this regard would be helpful. 

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. In particular, under the new regime, non-UK residents may still be subject to UK tax on carried interest relating to UK-based services, but for qualifying carried interest (i.e. carried interest where the fund meets the required AHP) there is a safe harbour, so that this only applies to the extent that the non-resident spent more than 60 days in a year performing more than 3 hours of investment management services in the UK (‘UK workdays’).

As noted above, this 60 day limitation is not available for non-qualifying carried interest and as such this led to a concern that non-residents would effectively have to compute the AHP of every fund they held carry in, even if they had less than 60 workdays in a year, to determine their UK tax position. This somewhat reduced the potential utility of the 60 day safe harbour.

The Finance Bill helpfully addresses this by allowing this 60 workday safe harbour to be used where it is ‘reasonable to assume’, when the first UK workday took place, that the carried interest would have been ‘qualifying’. 

There have also been changes to how the ‘relevant period’ is computed – this being the period of time over which you have to assess the proportion of ‘UK workdays’ and so the proportion of carried interest that is subject to UK tax. The relevant period now starts on the earlier of an investor being admitted to the fund and the executive in question starting to provide investment management services under those arrangements (i.e. it is now linked to the executive’s role with the fund).  Importantly, the relevant period now ends on the earlier of the carry being paid out (broadly speaking) and the executive in question ceasing to provide investment management services under those arrangements. This is aimed at dealing with the situation where an executive moves jobs and moves to the UK holding carried interest associated with their prior role more fairly and should reduce the scope for carried interest that is entirely unrelated to a UK role to be brought into the UK tax net. 

Our Assessment

The above summary is a very quick, high level, skim through the big ticket changes proposed by the Finance Bill.  There are many, many clarifications amendments and improvements to various esoteric technical points that have been raised and we have not tried to cover all of these here. While the reforms still increase the overall tax (and compliance) burden on carried interest holders, and leave some thorny topics (such as double tax treaty relief) still to be resolved, overall they are to be welcomed as a significant improvement on the prior draft legislation. 

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. 

For further guidance or impact analysis tailored to your fund or executive team, please contact your usual firm representative or a member of our tax team.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.