The UK tax landscape for private equity is undergoing significant reform, with new rules having taken effect from April 2025. These changes will have a substantial impact on fund managers and other professionals who have an entitlement to receive carried interest. Whilst most of the changes were confirmed as part of The Chancellor’s Autumn Budget in October 2024, HMRC continue to engage in consultations to agree the finer details.
The changes come as part of a broader initiative by the Government to increase tax revenues and address perceived inequities in the tax system. The Autumn Budget specifically targeted carried interest despite protests from industry figureheads and stakeholders, who stressed the importance of maintaining the UK’s competitiveness as a private equity hub and, more importantly, a financial centre. Below, we outline the key changes and considerations which will impact those working in the industry.
Higher Capital Gains Tax Rate
From 6 April 2025, carried interest is subject to a new, higher capital gains tax (CGT) rate of 32%. This is a notable increase from the previous rate of 28% and is designed to narrow the gap between the taxation of carried interest and income tax rates.
Carried interest will continue to be taxed when proceeds are actually received by the fund manager, rather than when the entitlement arises. This timing aligns the tax liability with the distribution of profits, which differs from how carry is taxed in other jurisdictions (notably the US) and so this is a consideration for internationally mobile executives.
Carried interest from April 2026 and beyond
The increased 32% rate of CGT for carried interest receipts will however only apply for one tax year, until 5 April 2026. Beyond that date, carried interest will be reclassified as ‘trading income’ and thus subject to Income Tax (rather than CGT), and Class 4 NICs.
However, in an attempt by the Government to maintain London’s competitive advantage for Financial Services as alluded to earlier, ‘qualifying’ carried interest will be subject to a 72.5% multiplier. This multiplier imposes an effective tax rate of 34.075% which, whilst notably higher than the 28% CGT rate of old, is still lower than the additional income tax rate of 45%.
Non-qualifying carried interest will be treated as Income Based Carried Interest (IBCI) and will follow the same treatment as previously, being treated and taxed as profits from a deemed trade and thus subject Income Tax and NICs.
Whilst this new approach seems simple enough, uncertainty remains in terms of what constitutes ‘qualifying’ carried interest in order to access to the 72.5% multiplier. It remains to be seen whether the familiar rules of old will be followed, or whether the Chancellor imposes additional qualifying criteria. Potential conditions could involve a minimum co-investment requirement, or an extension to the minimum average weighted asset holding period. HaysMac were involved in HMRC’s consultation process to ensure that the views of our clients who will be impacted are heard.
There are special rules which will apply to non-resident carry recipients where services have been performed from the UK, as well as those who are new to the UK and can therefore benefit from the 4-year Foreign Income and Gains (FIG) regime. Seeking bespoke advice will be especially important for these individuals.
Compliance and reporting
HMRC recently updated its guidance regarding the level of information and disclosures that are recommended in order to reduce the likelihood that an individual’s Tax Returns are subject to compliance checks.
Whilst not mandatory, HMRC suggests that carry recipients include the following information with their Tax Return submissions:
- Explanatory disclosure notes within the Tax Return
- Supporting computations showing how the carry figures were calculated
- A copy of the ‘tax pack’ where provided by the fund.
Carry recipients are expected to make reasonable efforts to obtain the necessary information to complete their Tax Returns, and penalties should not apply where reasonable care is demonstrated. It should also be noted that HMRC recently stated that simply obtaining a copy of the fund’s ‘tax pack’ does not constitute taking ‘reasonable care’ in ensuring that your Tax Returns are correct, especially in instances where the tax packs are produced for another jurisdiction rather than being UK-specific. Taxpayers should therefore take additional steps where possible to ensure that their Tax Returns are correct.
What should private equity professionals do now?
With these changes on the horizon, private equity fund managers and those with entitlements to receive carried interest should engage with their advisors to discuss the tax changes and the important considerations:
- Whilst it is now too late for crystallisation events to take advantage of the previous 28% CGT rate, pre-5 April 2026 exits will be subject to CGT at the rate of 32% and so it is worthwhile reviewing your exit pipeline and assessing the impact of these for the carry recipients.
- Non-resident or newly resident carry recipients should seek professional advice as early as possible to ensure that they are taking advantage of the opportunities presented by the new rules and the FIG regime.
- Fund administrators may consider the contents of their ‘tax packs’ to assist UK carry recipients with their reporting and compliance requirements.
- Carry recipients may wish to revisit their reward/compensation arrangements to take the new tax regime and rates into account.
- Once further clarity has been provided on the conditions required to be met in order to be deemed ‘qualifying carried interest’, existing and future investments and structures should be revisited.
For further guidance or to discuss how these changes may affect you or your fund, please contact a member of our specialist tax team.
