UK: Update on consultation on tax treatment of carried interest

HM Treasury on June 5, 2025, released a Government Response and Policy Update on the recent consultation on the tax treatment of carried interest.

There are a few notable developments, particularly in relation to the potential extra-territorial scope of the new rules. Significantly, for non-UK residents, there is proposed to be an effective grandfathering of time spent in the UK before October 30, 2024, and, going forward, such individuals would come within the scope of the rules for a tax year only if they spend at least 60 workdays in the UK.

Other key highlights include:

• Revised tax regime: As expected, under the new regime for taxation of carried interest (to be effective from April 2026), carried interest would be taxed under the income tax framework, and classified as trading profits. A special 72.5% multiplier would apply to “qualified” carried interest. Trading profits may also be subject to Class 4 NICs such that qualifying carried interest would be subject to tax at an effective rate of 34.075% for UK additional rate taxpayers.
• Minimum co-invest and minimum holding period conditions: The government has opted not to proceed with a minimum co-investment requirement and a minimum carry holding period condition, due to potential complexity.
• Territorial scope adjustments: Under the scope of the revised tax regime, UK taxation would apply to carried interest related to services performed in the UK, with specific limitations to alleviate double taxation. Any UK services performed in a tax year would also be treated as if they were non-UK services if three full tax years (in addition to the current tax year) have passed during which time the individual was neither UK tax resident nor met the 60-day UK workday threshold. Double taxation treaties may also be applicable.
• Income-based carried interest (IBCI): The document reconfirms that from April 2026 carried interest that is an employment-related security would not be excluded from the IBCI rules. The IBCI rules broadly require that, in order for carried interest to be qualifying, the underlying investments from which it is derived must be held for an average holding period (AHP) of more than 40 months. The government will make targeted amendments to the AHP requirement with the intention that the rules operate effectively for private credit, secondary, and fund of funds strategies.

Draft legislation will be published for consultation prior to the introduction of the Finance Bill 2025-2026.

Read a June 2025 report prepared by the KPMG member firm in the UK