Answers · UK 2025/26
How is carried interest taxed in the UK?
Carried interest (the performance-related share of fund profits paid to private equity and fund managers) is generally taxed as a capital gain at 28% (since October 2024) rather than income tax rates. However, the "income-based carried interest" (IBCI) rules tax arrangements with a short average holding period as employment income. From April 2026, the government has proposed further reforms to bring more carried interest within income tax.
Full answer
Carried interest is the share of fund profits received by fund managers (typically 20% of profits above a hurdle rate) as reward for managing the fund. The key question is whether it is taxed as income or capital. Historical position: the UK taxed carried interest as capital gains (28% rate for gains above the basic rate band) on the basis that fund managers bear economic risk. IBCI rules (Finance Act 2016): if the average holding period of fund investments is less than 40 months, part or all of the carried interest is treated as income and taxed at marginal income tax rates (up to 45%). Post-October 2024 CGT reform: the CGT rates on carried interest changed from 28% to a new rate -- from 6 April 2025, carried interest is subject to a blended rate, initially set at 32% (as an interim measure), with further reform planned. The government announced in Autumn Budget 2024 that from April 2026, all carried interest will be brought within income tax at a modified rate of 45% (with a 72.5% inclusion rate, resulting in an effective rate of 32.625%). Disguised investment management fees (DIMF): Finance Act 2015 introduced rules to tax as income any amounts that are effectively management fees dressed up as carried interest (e.g., guaranteed returns not dependent on fund performance). The DIMF rules apply regardless of how the arrangement is structured. Practical impact: genuine carried interest with long holding periods retains CGT treatment (at 32% from April 2025 until April 2026 reform takes full effect). Fund managers should review their arrangements with specialist tax advisers. HMRC guidance: Investment Funds Manual IFM36000.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.