Proposal to amend UK carried interest tax regime: Part one

Major change is coming to the UK carried interest tax regime. In part one of a two part series, we outline the key aspects of the new proposals.

Key points include:

• Increase in tax on carry from 28% to 32% in April 2025, and again to c.34% from April 2026.

• From 2026, carry taxed at a flat tax rate of c.34% no need to consider nature of the return (which is the current regime), capital gains, interest and dividends all taxed the same rate.

• New regime has winners and losers. Winners e.g. credit funds, previously taxed at 45% on interest will now have a lower c.34% rate. Losers e.g. VC previously taxed at 28% now at c.34% as virtually all returns are usually capital gains. RE and PE likely to be less affected.

• Big impact for non-UK carry holders who spend time working in the UK and may now be subject to UK tax on carry even after they have left the UK. This will deter overseas fund managers from spending time in the UK.

• All UK carry holders will be treated as carrying on a trading business and will now need to register for self-assessment with HMRC under the rules.

In conclusion, while some aspects of the new proposals are indeed simpler and more understandable, other crucial elements of the new regime deter investment and add unnecessary complexity and compliance burdens.

Part two in the series will look at some of the other proposed changes including an expanded IBCI test, coinvest and minimum hold period for the carry to be held.