UK carried interest draft legislation: DLA Piper’s insights

As part of the UK government’s proposal to reform the tax treatment of carried interest, the government published the draft legislation on 21 July 2025: link here. The draft legislation will be included in the Finance Bill 2025/26, with the revised regime to take effect from 6 April 2026. 

The draft legislation aligns with the prior consultation documents and discussions we have had with HMRC and HM Treasury. Additionally, it provides clarity on several of the issues.  See further below.

Key changes

Starting in April 2026, a revised tax regime for carried interest will be introduced. Fund managers will need to consider three key changes:

• Increased tax rate for carried interest: all ‘qualifying carried interest’ will be treated as trading profits and subject to a ‘flat tax rate’ of (up to) 34.075%, including national insurance contributions (NICs), irrespective of the nature of the return.

• Territorial scope of the revised regime: carry holders who spend time working in the UK may be subject to UK taxation on their carry even after leaving the UK.

• Average holding period (AHP) test (currently known as the IBCI test): the employment related securities (ERS) exclusion is to be abolished. Investment schemes will therefore be required to hold their assets for at least 40 months, using the weighted average investment-holding period, in order for the carry to considered ‘qualifying carried interest’ and be subject to the c.34.1% rate. Carry that does not satisfy the AHP test will be taxed at ordinary trading income tax rates of up to 47% (including NICs). 

Fund managers should begin considering how these rules will impact carried interest in their funds.

Read the full breakdown of the key changes below.