UK plans higher taxation of carried interests

A new regime for the taxation of so-called "carried interests" ("carry") is currently being discussed in the UK, which is to apply from April 2026. Carry is a performance-related remuneration that fund managers receive, particularly in the private equity and venture capital sector. It is a percentage share of a fund's profit that goes beyond pure management activities and serves as an incentive for high performance.

Under the new regime, carry payments would be subject to income tax at a rate of around 34 per cent and classified as notional business income. According to the UK government, carry should be seen as a reward for services in the form of performance-related remuneration rather than as a form of capital income, which is taxed at only 18 per cent and 28 per cent. A similar development already took place in Germany in 2004, according to which, under certain conditions, carry payments from asset management funds generally qualify as income from self-employment and 60 per cent of this income - to date - is subject to the personal tax rate.

The planned regime change in the UK would mean that the UK would typically also secure the primary taxation rights for these payments under the existing double taxation agreements, thereby creating the threat of double taxation of fund managers' carry payments. The double taxation agreement with Germany does not always help here either: fund managers who live in Germany must pay tax on their entire income, including carry payments, in Germany. It can happen that the tax already paid in the UK on carry income is not credited or exempted. There is therefore a risk of double taxation. In addition to this threat of double taxation, the fund managers would also be subject to an additional tax declaration obligation in the UK for the carry payments.

In order to mitigate potential double taxation and protect London as an attractive international fund centre, the UK government has included the following reliefs in the current draft legislation:

• Firstly, all services provided in the UK before 30 October 2024 by non-UK tax residents will be treated as if they were non-UK services.
• Secondly, a de minimis limit of 60 working days in the UK is provided for persons who are not tax resident in the UK in the relevant tax year.
• Thirdly, services provided in the UK in a tax year are treated as if they were non-UK services if three full tax years (in addition to the current tax year) have passed in which the individual was neither tax resident in the UK nor exceeded the 60-day limit for working days in the UK.

Additional qualifying conditions in the form of a minimum co-investment requirement and/or a minimum holding period for carried interest have been rejected by the UK government due to the potential complexity.