New UK Tax Rules on Carried Interest Create Winners and Losers

The UK government will introduce a new tax regime for carried interest, or carry, starting in April 2026. This is a share of a fund’s profits allocated to fund managers after investors receive back their capital plus a preferred return.

This new regime will raise the tax rate to a flat 34.1%. It simplifies the current UK tax regime, removing the need to distinguish between capital gains, interest, and dividend income.

The simplification also will come with trade-offs.

It creates clear winners and losers across asset classes: Credit funds may benefit from a lower effective tax rate, while venture capital funds that typically generate capital gains face a substantial increase in their tax liability. Other asset classes such as private equity, infrastructure, and real estate, may be less affected, depending on their structure.

Beyond the headline rate, two additional changes make the new UK regime less attractive. Taxing carry after individuals cease to be UK tax resident creates double taxation risks, and tracking asset holding periods will incur costs for each fund.

Despite these challenges, the changes could have been more severe. The industry had feared a rise to 45%, in line with employment income tax rates. In that context, the 34.1% rate may be seen as a compromise.

How Carry Works

The concept of carried interest is said to date back to 16th-century Venetian ship captains who earned a share of profits of the cargo, known as the “carry,” for successful delivery to foreign ports. This performance-based reward system laid the foundation for modern carry structures.

Today, carry aligns fund managers with investors by offering incentives for strong returns. Carry is paid out only after the investors receive back their committed capital and preferred return, with managers receiving around 20% of the excess profits. This model has been central to the growth of asset management, offering significant upside for senior fund managers beyond their base salary.

In most jurisdictions, carry is held through a dedicated carry vehicle. This typically is structured as a separate limited partnership in European funds, or through the general partner in US funds. Carry holders are admitted as limited partners to the carry vehicle.

A key reason fund managers prefer having a separate carry vehicle is confidentiality. The main fund’s limited partnership agreement will stipulate that carry is paid to the carry vehicle without disclosing the identities of the carry holders.

In addition, the carry vehicle provides operational flexibility, as it allows for admission of new joiners, the forfeiture of carry by departing individuals (known as bad leavers) and allocation of additional carry to high performers—all without requiring amendments to the main fund limited partnership agreement.

New Carry Rules

Currently, carry is taxed based on the nature of the return: capital gains at 32% (a 4% increase since April 2025), interest income at 45%, and dividends at 39.35% rates—all at the maximum rate.

Under the new regime, a flat circa 34.1% rate will apply uniformly across all types of returns, including capital gains, interest, and dividends. This simplification potentially removes the need for tax-transparent holding structures designed to preserve capital gains treatment.

The introduction of a flat rate creates a more straightforward tax framework but will lead to uneven outcomes across asset classes.

The big winners potentially will be credit funds, which previously faced higher income tax rates of 45% on their carry consisting of interest income, and now may be subject to the lower 34.1% rate. Conversely, venture capital funds, typically generating only capital gains, face an increase in their tax rates from 28%.

Real estate, infrastructure and private equity may see little change to their effective tax rate, depending on how they are structured.

The second big change is taxing individuals even after they cease to be UK tax residents. This will be calculated proportionally, based on the time that the carry holder spent performing investment management services in the UK versus time spent overseas. For example, if a fund has a 10-year life and a carry holder leaves the UK at the end of year nine, 90% of their carry will still be subject to UK tax.

This approach raises the risk of double taxation, as other jurisdictions may not recognize the carry as UK source trade profits (with the UK having primary taxing rights) and may assert their own taxing rights (capital gains). Overseas fund managers, particularly from the US, may avoid spending time in the London office due to concerns that the UK could assert taxing rights over their carry.

The third significant change is the introduction of an average holding period. To qualify for the 34.1% rate, the fund must hold its assets for a weighted average of at least 40 months. This will add operational complexity and costs, as funds will have to track asset holding periods carefully.

It also may misalign the interests of fund managers and investors. For instance, if a fund receives an attractive offer to sell a portfolio after 30 months, accepting it may be beneficial for investors but could result in higher tax rates for managers if the average holding period threshold is not met.

Significant Timing

The fact that the Labour government acted swiftly upon entering office may have spared the industry from more aggressive tax-raising reforms which are now being contemplated. Given the current fiscal pressures, it’s plausible that a delayed review of carried interest could have resulted in significantly higher tax rates.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Michael Graham is tax partner at DLA Piper in London, advising investors and sponsors on investment funds and carried interest.

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