Treasury publishes outcome of call for evidence on the tax treatment of carried interest
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The Treasury has published the outcome of a call for evidence on
the tax treatment of carried interest Background At Autumn Budget
2024, the government announced its proposals to reform the tax
treatment of carried interest, a form of performance-related reward
received by fund managers, to ensure that the tax regime
appropriately reflects the economic characteristics of the reward.
Following an increase in the applicable rate of Capital Gains Tax
to 32%, which took...Request free trial
The Treasury has published the outcome of a call for evidence on the tax treatment of carried interest Background At Autumn Budget 2024, the government announced its proposals to reform the tax treatment of carried interest, a form of performance-related reward received by fund managers, to ensure that the tax regime appropriately reflects the economic characteristics of the reward. Following an increase in the applicable rate of Capital Gains Tax to 32%, which took effect from April 2025, a revised tax regime for carried interest will be introduced from April 2026 which sits wholly within the Income Tax framework, with all carried interest treated as trading profits and subject to Income Tax and Class 4 National Insurance Contributions (NICs). Taking account of the unique characteristics of the reward, the amount of ‘qualifying' carried interest subject to tax will be adjusted by applying a 72.5% multiplier. The government published a Summary of Responses and Next Steps document at Autumn Budget, following a call for evidence which ran between 29 July and 30 August 2024. This document outlined how the revised regime will operate and committed to explore points of technical detail with stakeholders through the establishment of a working group. Consultation on Qualifying Conditions The Summary of Responses and Next Steps also launched a consultation, set out in Chapter 4 of that document, exploring the case for further conditions of access (in addition to the existing asset-level average holding period condition) in order for carried interest to be treated as qualifying, specifically:
The consultation ran from 30 October 2024 to 31 January 2025 and over 60 responses were received from a range of individuals, businesses, advisory firms, representative bodies and academics. Officials also held several meetings with interested parties. The government is grateful to all those who provided insights during the consultation. Chapter 2 of this document summarises the responses received to the consultation and the government's response. Chapter 3 provides an update on the implementation of the revised regime and issues arising from discussions with the technical working group. The government will bring forward legislation for the revised tax regime for carried interest, including the detail set out in this document, in Finance Bill 2025-26. Ahead of that, the government will publish draft legislation for technical consultation. Officials will continue to meet with stakeholders, including through the technical working group, to undertake that technical consultation. 2. Qualifying Conditions: Summary of Responses and Government Response Overview Chapter 4 of the Summary of Responses and Next Steps published at Autumn Budget 2024 outlined that the government was exploring the case for further conditions of access (in addition to the existing asset-level average holding period condition) in order for carried interest to be treated as qualifying, specifically:
As set out in the Summary of Responses and Next Steps published at Autumn Budget 2024, the call for evidence conducted between 29 July and 30 August 2024 identified a number of practical challenges associated with implementing a co-investment condition, especially if the requirement was applied on an individual-by-individual basis. It is for that reason that only a requirement measured at the ‘team' level was considered via this consultation, with the government stating that it would not proceed with any new condition which risks creating arbitrary or distortive outcomes or which would be unworkable in practice. Chapter 4 of the Summary of Responses and Next Steps set out the terms of the consultation and specifically invited input on the following questions:
This Chapter summarises the responses received to these questions and sets out the government's response. Aggregate minimum co-investment condition Summary of Responses The vast majority of respondents opposed the introduction of a minimum co-investment requirement even if measured at a team level. Respondents said such a requirement would be complex and impractical, making the UK tax regime for carried interest less competitive compared to other jurisdictions and potentially causing distortions in the market. Several respondents made the point that fund managers are already expected to co-invest alongside investors to ensure interests of all parties are aligned and that it was therefore not necessary for the government to use tax policy to intervene in the operation of the market. Respondents also queried the conceptual link between a co-investment commitment and carried interest with some suggesting that the government's decision to move carried interest into the Income Tax framework weakened the case for a minimum co-investment requirement. Q1: Recognising the challenges in this area, how might any team-level co-investment requirement be most successfully constructed? Respondents said the rules would need to be drafted broadly so as to reflect the wide variety of structures that are used in practice. In particular, the definition of ‘fund' should be wide enough to include contributions made via an aggregator or feeder vehicle, parallel fund or alternative investment vehicle. Respondents also focused on the definition of ‘team', which they said would need to be wide enough to include indirect commitments made via family, friends or an affiliated entity. Several respondents also argued that commitments made by the ‘house' (i.e. one of the vehicles in the fund manager's corporate group) should count towards any requisite co-investment. Q2: Are there any further risks and/or wider considerations, beyond those identified via the call for evidence, that should inform decisions on whether the government progresses with a co-investment requirement? Respondents highlighted a number of wider considerations beyond those identified via the call for evidence. One such consideration was the appropriate threshold for a co-investment requirement. Respondents said this would vary from fund to fund but the prevailing view was that 1% would typically be appropriate although concerns were raised that this would be prohibitive for certain strategies and the largest funds. It was suggested that the threshold for funds above a certain size could be reduced as a way of mitigating this issue. Some respondents also made the point that new firms entering the market may lack the available capital to make material co-investments into their first fund, meaning that a co-investment requirement would put such new entrants at a competitive disadvantage. That, in turn, could damage efforts to attract a greater diversity of talent to the industry. Respondents also argued for transitional provisions for existing arrangements in the event that this proposal was taken forward. Existing funds structured around current rules could have limited scope to increase co-investment in order to meet the requirement. Government response As acknowledged in the Summary of Responses and Next Steps published at Autumn Budget 2024 and confirmed through subsequent engagement, implementing a minimum co-investment requirement would have a number of practical challenges, with a risk of creating unintended and/or distortive outcomes. Reflecting this, and the conceptual distinction between carried interest and returns on co-investment, the government will not proceed with the introduction of a minimum co-investment requirement. Minimum holding period for carried interest rights Summary of responses The majority of respondents similarly opposed the introduction of a minimum time period requirement. Again, concerns were raised that it would make the UK less competitive compared to other regimes. The UK already has an asset-level average holding period condition, which requires that the relevant fund holds its assets for at least 40 months, on average, in order to access preferential tax treatment in full. No other carried interest regime has such a condition and a time period requirement measured at individual level. Several respondents also suggested that to the extent the government was concerned about carried interest being used as a short-term performance reward, protections already exist in the form of tax charges on awards of carried interest (including the employment related securities (ERS) rules). Some respondents suggested that if the government were to introduce a minimum time period requirement, it would need to be combined with reforms to the ERS regime. Q3: How might the length of any new time-based condition best be designed to reflect the nature of carried interest rewards? Respondents said the average time period between reward and receipt varied from fund to fund depending on investment strategy and asset portfolio. The time period could exceed 10 years in venture capital funds but be far shorter in other funds. The appropriate time period suggested by respondents varied considerably. Some respondents suggested a time period as short as 12 to 18 months. Others suggested 24 months (to align with Business Asset Disposal Relief rules), 40 months (to align with the existing asset-level average holding period condition) or five years (to align with the most comparable rules in other jurisdictions). Various situations were also highlighted where respondents felt special rules would be required:
Most respondents felt that unless specific provision was made for such situations (which would add complexity) individuals would be unfairly excluded from qualifying carried interest treatment. Several respondents also argued that if a minimum time period requirement was introduced, it would be possible to satisfy the requirement by holding back carried interest in a blocked or escrow account until the minimum time period has elapsed. Q4: Do you foresee any unintended adverse consequences for fund managers in existing funds from a government decision not to introduce transitional arrangements on the introduction of a condition of this kind? Many respondents argued that transitional arrangements would be required if a condition of this kind was introduced. It was suggested that not doing so would adversely affect existing funds established when the current rules were in place, which may have structured their arrangements differently had they been aware of the requirement. Government response As set out in the Summary of Responses and Next Steps published at Autumn Budget 2024, the tax treatment of qualifying carried interest under the revised regime reflects its unique characteristics. This includes the long-term nature of the reward, with a typically lengthy period between award and payout. The purpose of a minimum time period requirement would be to ensure that only rewards of a genuine long-term nature can access qualifying carried interest treatment. Having carefully considered responses to the consultation, the government has concluded that the existing asset-level average holding period condition, combined with the tax rules which apply to awards of carried interest, are effective in limiting qualifying carried interest treatment to long-term rewards. As a result, the government considers that the complexity associated with a minimum time period requirement would not be proportionate and will not be proceeding with its introduction. 3. Update on the Implementation of the Revised Tax Regime for Carried Interest In the Summary of Responses and Next Steps document published at Autumn Budget 2024, the government recognised the complexity of legislation in this area and the need for detailed technical consultation as the revised regime is implemented. The government committed to establishing a technical working group for this purpose. Over 50 businesses, advisory firms, and representative bodies have joined the working group, which has met on several occasions to discuss various aspects of the revised regime. The government is grateful to all members of the working group who have contributed their time and expertise. The working group will continue to serve a valuable function in the run-up to the introduction of the measure in April 2026 as the government finalises the details of the revised regime. This Chapter sets out the government response to some of the issues raised through the working group and other discussions with stakeholders, as well as outlining the next steps in the implementation of the revised regime. Average holding period condition As announced at Autumn Budget 2024, the government will legislate to remove the exclusion for ERS from the asset-level average holding period (AHP) condition currently contained in Chapter 5F, Part 13 of the Income Tax Act 2007[footnote 1], ensuring that the rules apply fairly to all fund managers who receive carried interest under the revised regime. In addition to the removal of the ERS exclusion, the government committed at Autumn Budget 2024 to make targeted amendments to the AHP condition to ensure it operates effectively. The government recognised that some funds, in particular private credit funds, faced practical difficulties in applying the AHP condition to their investment strategy despite in substance carrying out a long-term investment strategy. The government is grateful for the extensive input on these matters from a range of stakeholders. Those discussions have brought to light a range of areas where amendments to the AHP condition can be made to improve its operation without undermining the core purpose of the rules, which is to exclude funds which do not carry on a long-term investment strategy. The government therefore intends to make a number of legislative changes to the AHP condition, including the following (with statutory references being references to the current legislation in Income Tax Act 2007):
Taken as a whole, this package of amendments is intended to ensure that the AHP condition operates fairly and does not create arbitrary or distortive outcomes in respect of particular investment strategies. They do so while retaining core features of the AHP condition, including the mechanics for calculating the average holding period and the concept of conditionally exempt carried interest, which will continue to be of central importance in ensuring that access to qualifying carried interest treatment in the revised regime is appropriately limited. Territorial scope of the revised regime The Summary of Responses and Next Steps document published at Autumn Budget 2024 explained that the deemed trade under the revised regime will be treated as carried on in the UK to the extent that the relevant investment management services are performed in the UK, with the effect that non-UK residents will be subject to Income Tax on carried interest to the extent that it relates to services performed in the UK (subject to the terms of any applicable double tax agreement). The territorial scope of the revised regime reflects an important principle. The government is clear that carried interest is, in substance, a reward for the provision of investment management services. It follows that where those services are performed in the UK, the reward should be taxed in the UK. In particular, the government is not willing to maintain a position in which a fund manager can spend many years working in the UK, only to become non-resident shortly prior to receiving carried interest and thereby not be subject to UK tax on the reward. Stakeholders who have engaged with the government since the announcement at Autumn Budget 2024 recognise that it is appropriate for the government to ensure that work which takes place in the UK is taxed fairly. However, stakeholders have also raised a range of concerns about how the territorial scope of the revised regime will work in practice, in particular whether there is a risk of double taxation where a non-UK resident is taxed on carried interest both in their jurisdiction of residence and the UK. The UK has an extensive network of double taxation agreements (DTAs). The government's view is that a typical DTA will allocate taxing rights to the UK in respect of carried interest received by a non-resident which is attributable to a UK permanent establishment[footnote 2]. This reflects the fact that carried interest is, in substance, a reward for the provision of investment management services. The UK's domestic legislation will reflect this fact. The government recognises, however, that there may be uncertainties relating to other jurisdictions' approach to the application of DTAs, in particular in cases where carried interest is treated as an investment return under another jurisdiction's domestic law. Although there are established mechanisms to resolve international tax disputes, the government acknowledges that the potential need to rely on such processes creates uncertainty, which in turn risks discouraging fund managers from choosing to work in the UK. In recognition of this uncertainty, the government intends to introduce three statutory limitations on the territorial scope of the revised regime. These limitations will ensure that the territorial scope of the revised regime applies in a proportionate way, balancing the government's dual aims of ensuring that the rewards for work which takes place in the UK are fairly taxed and maintaining the UK's attractiveness as an international hub for asset management activity. The statutory limitations, which will apply where qualifying carried interest arises to a non-resident, are as follows:
These statutory limitations will apply as a matter of UK domestic law and will be in addition to any relief available under an applicable DTA (for example, where the relevant individual does not have a UK permanent establishment, which will be a question of fact in each case). The government also intends to provide clarity on how carried interest is apportioned between investment management services performed in the UK and those performed outside the UK. In order to provide certainty for taxpayers, as well as enable HMRC to effectively monitor compliance, the government will mandate a time-based apportionment method, by reference to the number of UK workdays in the relevant period. As a consequence of the provisions set out in paragraphs 3.15 to 3.17 above, qualifying carried interest which arises to a non-resident will only be subject to UK tax where it relates to services performed in the UK (determined by reference to the number of UK workdays) and all of the following apply:
The government considers that this strikes an appropriate balance between ensuring work carried out in the UK is fairly taxed while preserving the UK's competitive position as a global asset management hub. . Moreover, our approach will place the tax treatment of carried interest on a stable footing for the long term. The government will continue to work with stakeholders on technical aspects as it implements these aspects of the revised regime, including further detailed discussions on HMRC's approach to the application of DTAs. Update on Other Issues Through the technical working group and other meetings with stakeholders a wide range of detailed issues relating to the implementation of the revised regime have been considered. Many of those issues will be addressed in the draft legislation for the revised regime and the government looks forward to further engagement with stakeholders following publication of the draft clauses. One particular issue raised by several respondents relates to the payments on account rules in section 59 of the Taxes Management Act 1970. Payments on account due under these provisions are calculated by reference to a person's total Income Tax and Class 4 NICs liability for the previous tax year. The government can confirm that under the revised regime Income Tax and Class 4 NICs paid in the previous tax year on carried interest will be relevant to the calculation of any payments on account due. While the government recognises that carried interest receipts can be irregular and unpredictable in nature, the same is true of other forms of trading profit. There is a mechanism for taxpayers to make a claim to reduce or cancel payments on account to avoid overpayments of tax. Next Steps The government will bring forward legislation for the revised tax regime for carried interest in Finance Bill 2025-26. Before the Summer Recess, the government will publish draft legislation for technical consultation. Officials will continue to meet with stakeholders, including through the technical working group, in order to undertake that technical consultation. Annex A: List of Respondents
A number of representations were also provided in a personal capacity.
Original call for evidence SummaryThe government has published a call for evidence, inviting views from stakeholders on its plans to reform the tax treatment of carried interest. This call for evidence ran from 29 July to 30 August 2024. Call for evidence description On 29 July, the Chancellor of the Exchequer announced a commitment to take action in respect of the ‘carried interest' loophole. Carried interest is a form of performance-related reward received by fund managers, primarily within the private equity industry. This call for evidence confirms the government's intention to take action against the carried interest loophole, and forms the basis for detailed engagement with expert stakeholders. It also sets out a series of areas where we would particularly value input from stakeholders. Documents The Tax Treatment of Carried Interest – a call for evidence HTML
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