Carried Interest and disguised investment management fees

Reform of the tax treatment of carried interest from April 2026

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, there will be a further increase to an effective rate of 34.1%. This further increase will be 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.

The BVCA has engaged closely with the Government at every stage of the development of these reforms, to ensure that the impact of the changes on the industry is understood by all relevant policy-makers. This has included providing further detailed information about the international scope of the new regime, challenges associated with the income based carried interest (“IBCI”) rules, and the impact of the application to carried interest of the rules on payments on account. On 5 June 2025, following BVCA 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.

Consultation on the taxation of carried interest of October 2024

In October 2024, the Government launched a consultation on the tax treatment of carried interest, 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.

The BVCA’s response explained the impacts of the proposed new conditions and argued that neither condition was required. We set out:

The importance of the Government recognising the vital contribution that private capital makes to the UK economy and the unique and long-term characteristics of carried interest.
The impact of the proposed conditions on the UK’s competitiveness.
The international taxation challenges which would arise from the transition from capital gains to income.
The need to modernise the IBCI rules to keep pace with fund strategies that had emerged in the nine years since the IBCI rules entered into force.

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. The BVCA’s 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. The BVCA 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.

OTS CGT review of July 2020

In July 2020 the Office of Tax Simplification published a review of capital gains tax. We responded to the review and produced a summary document on carried interest which included international comparisons. We also published a comment piece following the OTS’s interim report and the New Horizons Report showcasing how the industry contributes to the UK economy and can help address a range of policy challenges and opportunities. We engaged closely with officials and stakeholders ahead of the 2021 Spring and Autumn Budgets and no changes to CGT were announced. The Government published a response to the OTS report in November 2021 where they announced simplifications to the CGT regime and that they would keep the regime under review (but did not officially accept or reject recommendations from the OTS’s first report which discussed aligning the CGT rate with income tax rates).

Changes to the taxation of carried interest in 2015 and 2016

The disguised investment management fees (DIMF) rules were implemented to identify amounts received by investment managers that are, in substance, management fees and ought to be subject to income tax. The rules include specific exclusions for carried interest and co-investment returns, which are defined in legislation.

In July 2015, the Government announced changes to the capital gains tax treatment of carried interest which were designed to ensure that “individuals will normally be charged to capital gains tax on the full amounts they receive in respect of their carried interest”. Further changes were introduced in April 2016, which meant that, in some circumstances, carried interest (however it is structured) can be treated as chargeable to income tax. The regime was introduced to address Government concerns that the previous carried interest tax regime (applied to carried interest paid out to private equity and other long-term investment funds) was being accessed by managers of short-term (essentially trading) funds.

The BVCA Taxation Committee engaged in significant and regular dialogue with HMRC and HMT on the accompanying guidance for both the DIMF and carried interest legislation. In October 2020, HMRC published the following guidance in its Investment Funds Manual:

Our dialogue on the carried interest guidance resulted in changes to the published version. Guidance related to the income-based carried interest rules is yet to be published.