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      Few tax topics have animated both the White House and Whitehall as much as the treatment of carried interest in recent years.

      In early 2016, then Presidential candidate Donald Trump set out his view on the treatment of carried interest (carry) as capital gains: “We will eliminate the Carried Interest Deduction … that has been so good for Wall Street investors” and previously noted that fund managers were “getting away with murder.” Whilst there were some tweaks in his first term, the “loophole”, as Trump described it, remained intact.

      At the start of 2025, the newly reinstated President Trump set out his intention once more to scrap the perceived advantageous treatment of carried interest as part of the One Big Beautiful Bill – but come its enactment, in July, the treatment was unscathed once more.

      Across the Atlantic, the current Labour Government were elected with a manifesto pledge: “Private equity is the only industry where performance-related pay is treated as capital gains. Labour will close this loophole”. Here action is underway, with the Autumn 2024 Budget setting out changes to both the rate and mechanisms through which carried interest is to be taxed in the UK. These Budget announcements were given a nascent legal framework in July 2025 with the release of draft legislation for consultation ahead of potential inclusion in this autumn’s Finance Bill, as discussed in this recent KPMG article.

      Given a landscape of legislative flux in both the US and UK regarding carried interest, what should fund managers who are exposed to both tax regimes have at the top of their minds when considering their tax position?

      Andrew Harrison

      Partner, US Private Client, Family Office and Private Client

      KPMG in the UK

      Comparable rates in ‘Blue States’

      The UK tax rate on capital elements of ‘qualifying’ carried interest has already moved from 28 percent to 32 percent for the 2025/26 UK tax year, and the tax rate on carried interest will step up again to an effective 34.08 percent in the case of qualifying carried interest when a new trading income regime for carried interest takes effect from April 2026. Reference to ‘qualifying’ carried interest is to a regime applying both before and following the April 2026 UK tax reforms, that broadly speaking applies the full trading income effective tax rate of 47 percent to ‘short term’ carried interest. As a simplification, carried interest will be viewed as short term where the weighted average holding period of investments, factoring in the timing of carried interest realisations is less than 40 months.

      Whilst the rates are increasing, the UK tax rate on carry continues to be competitive with the traditional, ‘Blue State’ private equity hubs in the US. The combined Federal and State/City tax rate on carry for someone living in Manhattan or Silicon Valley will usually sit on par, and in many cases could exceed the rate paid by their equivalents in London.

      However, for US citizens based in London, it is important to note that they will be paying the 3.8 percent Net Investment Income Tax (NIIT) to the Internal Revenue Service (IRS) on top of their UK tax and National Insurance bill, taking their top rate to a combined 37.88 percent. Only the very highest earners in Manhattan and Silicon Valley will be paying rates that high.

      Timing is everything

      Another common challenge for US citizen fund managers working in the UK is the timing difference between the US and UK tax points of carry. The US rules can often mean that carry is taxed much earlier than in the UK, and sometimes before the fund’s ‘hurdle’ return has been reached. By contrast the UK rules tax carry only when it ‘arises’, which usually means the point when proceeds received by the fund are allocated to carry.

      Under the US/UK Double Taxation Treaty, the UK would generally (but not always) have the ‘primary right’ to tax carry received by a US citizen who is a UK tax resident. That same carry will be subject to federal tax in the US, with a credit allowed for the UK tax. However, if the US taxes the carry earlier than the UK, the fund manager has a timing problem; one which can easily lead to double taxation.

      With careful planning and good advice the double tax risk can be mitigated. If the US tax point is a year or so earlier than the UK, accelerating UK tax payments may be sufficient to ensure double tax is avoided. Failing that, the fund manager could make an election under TCGA s.103KFA to recognise their carry on an ‘accruals basis’ which is more in line with the US rules. This election was introduced in 2022, specifically with US citizen fund managers in mind, but it is not without its pitfalls and it can be challenging to determine whether the election is worth making. For example, it might be extremely difficult to get the required information from the fund to calculate how much carry has ‘accrued’ in a particular tax year. Receiving good and timely advice is essential when considering making this election.

      A sting in the tail

      The forthcoming changes to the UK treatment of carry impact not just the rate at which it is being taxed, but also its character. Historically, qualifying carry has been subject to tax as a capital gain in the UK but, from 6 April 2026, it will instead be taxed as income from a trade.

      One impact of this change is that fund managers who leave the UK but continue to receive carry will be liable to UK tax as non-residents, on the proportion of their carry that relates to UK duties. This creates a UK tax ‘tail’ for potentially several years after departure. The tail is subject to various concessions which mitigate its impact, however under current proposals these mitigating rules will apply only to qualifying carried interest. It is also difficult to see how this will lead to equitable results for those who had not seen the need to make an accruals basis election as referred to above.

      There are many open questions on how the territoriality of the new carry regime will operate in practice, especially in the context of double tax treaties. The international standard is that carried interest arising from a partnership structure, as is typical in the industry, retains its tax ‘character’ as capital gain, interest, dividends, etc. The majority of carry represents capital gain on the sale of a fund’s portfolio assets, and capital gains are generally taxable only where a person is resident at the point they are realised (in a tax treaty context). Whilst the UK appears willing to provide credit for taxes imposed at the source, for example in relation to US withholding taxes notwithstanding qualification issues, it remains to be seen whether the UK’s treaty partners will allow credit for UK tax paid on the carry ‘tail’.

      As an aside, the new UK carried interest tax rules will not fundamentally change the effect of feeder entities, such as limited liability companies (LLCs), on the overall tax costs in repatriating the proceeds of carried interest. However, the UK characterisation of such feeder vehicles will continue to require careful attention to prevent unexpected issues in claiming double tax relief.

      In summary, US citizen fund managers based in the UK face a complex and evolving tax environment for carried interest. With rising rates, increasing complexity in treatment, and persistent timing mismatches between the two jurisdictions, proactive planning and specialist advice from those versed in the rules of both jurisdictions and their interaction with one another is essential to manage global tax exposure and mitigate the risk of double taxation.

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