Carried Interest Tax UK 2026-27: New Rules for Private Equity
A new carried interest regime took effect from April 2025, replacing the old 28% CGT treatment with a 32.5% blended rate. Here is what the changes mean for fund managers and how the transition rules apply.
Carried interest is the share of profits that fund managers receive as compensation for generating returns above a hurdle rate. It has long attracted controversy in the UK, with critics arguing that taxing it as a capital gain rather than income gave private equity professionals an unwarranted advantage. The government moved to address this from April 2025 with a new carried interest regime.
What Is Carried Interest?
When a private equity, venture capital, or real estate fund performs well, the general partner (typically the fund manager) receives a share of the profits -- usually 20% -- once investors have received their capital back plus a minimum return (the hurdle rate, often 8%). This profit share is carried interest.
In economic terms it resembles a performance bonus, but historically it has been structured so that it arises as a capital gain rather than employment income, benefiting from lower CGT rates.
The Old Regime: 28% CGT Treatment
Under the rules that applied up to 5 April 2025, carried interest was taxed as a capital gain provided it arose on assets held for more than 36 months. The applicable CGT rate was 28% -- the rate that applied to residential property and to carried interest specifically, not the main 20% rate.
This produced an effective rate significantly below the 45% additional-rate income tax charge that applied to ordinary performance bonuses paid to employees.
The New Regime from April 2025
The Autumn Budget 2024 announced a fundamental change. From 6 April 2025, carried interest is taxed as income (subject to income tax and Class 4 National Insurance) but with a modified inclusion rate of 72.5%.
In practice, this means:
- Additional-rate taxpayers: 45% x 72.5% = approximately 32.5% effective rate (before NI)
- Higher-rate taxpayers: 40% x 72.5% = approximately 29% effective rate (before NI)
National Insurance adds further cost. Class 4 NI applies at 2% on profits above the upper profits limit, adding approximately 1.5% to the effective rate for most fund managers.
The result is an effective blended rate of around 32.5% to 34% for additional-rate taxpayers -- meaningfully higher than the previous 28%, but still below the full 45% marginal rate.
Qualifying Conditions
Not all profit-sharing arrangements automatically qualify as carried interest under the new regime. To be treated as carried interest rather than ordinary income, the arrangement must meet conditions set out in legislation:
- It must arise from an investment fund (not a trading vehicle)
- The manager must hold a genuine economic interest in the fund, not a purely notional entitlement
- The carried interest must be contingent on the fund achieving a return for investors above cost
HMRC has published guidance on what constitutes a qualifying arrangement. Structures that do not meet the conditions risk being taxed as employment income or disguised remuneration.
Transition Rules
For fund managers with carried interest already accruing in funds established before April 2025, the transition is not straightforward. Key considerations include:
- Realisation timing: Carried interest that crystallises after 6 April 2025 falls under the new regime, regardless of when the underlying investment was made
- Fund documents: The terms of the Limited Partnership Agreement determine when carried interest is treated as arising
- Clawback provisions: Some funds include clawback mechanisms that can affect the timing and quantum of carried interest
HMRC has acknowledged the complexity and issued transitional guidance, but individual circumstances vary significantly. Fund managers should seek specialist tax advice rather than relying on generic guidance.
Comparison with Other Jurisdictions
The UK changes narrowed but did not eliminate the gap with comparable jurisdictions. The United States taxes carried interest at long-term capital gains rates (currently 23.8% including the net investment income tax) provided assets are held for more than three years. France and Germany have their own variants. The UK's new effective rate of around 32.5% sits above the US treatment but below pure income tax.
Planning Considerations for 2026-27
For fund managers operating under the new regime, several planning considerations arise:
Pension contributions. Carried interest is now treated as income for pension purposes, potentially enabling larger pension contributions and additional-rate relief.
Salary/carry mix. The narrowing of the gap between salary and carried interest tax rates reduces (but does not eliminate) the incentive to minimise salary in favour of carried interest.
Fund structuring. New fund structures being established since April 2025 should be designed with the new regime in mind from the outset, particularly regarding vesting periods and hurdle mechanics.
Inheritance tax. Carried interest as income rather than capital changes the estate planning picture for fund managers, since income assets receive different IHT treatment from investment assets.
The new carried interest regime represents a significant increase in the tax burden on private equity and venture capital professionals. While the 32.5% effective rate is still below full income tax rates, the change is substantial and requires careful review of both existing and new fund arrangements.
Frequently asked questions
What is the new carried interest tax rate from April 2025?
From 6 April 2025, carried interest is subject to income tax and National Insurance in the normal way, but with a 72.5% inclusion rate. For an additional-rate taxpayer this produces an effective rate of approximately 32.5% -- higher than the previous 28% CGT treatment.
What was the old treatment of carried interest?
Under the rules that applied until April 2025, carried interest arising on assets held for more than 36 months was taxed as a capital gain at 28% (the rate applicable to residential property and carried interest). This was widely regarded as preferential treatment for private equity fund managers.
Who does the new carried interest regime apply to?
The new rules apply to individuals who receive carried interest from investment funds. This includes fund managers and general partners at private equity, venture capital, infrastructure, and real estate funds.
Are there transition rules for carried interest already in flight?
Yes. HMRC has provided transitional guidance for carried interest that was accruing before the April 2025 change. The specific treatment depends on fund documentation and the timing of realisation. Professional advice is essential for funds straddling the transition.
Does the new regime affect venture capital managers differently?
The same rules apply across fund types, but the effective impact varies depending on holding periods, the nature of underlying assets, and fund structures. Some venture capital managers with shorter hold periods were already closer to income treatment under pre-2025 rules.
Related reading
Dividend Growth Investing in the UK: How the Tax Actually Works in 2026/27
Dividend growth investing means holding companies that reliably raise their payouts year after year. Outside an ISA, the £500 dividend allowance covers very little — here is exactly how much tax you'll pay as income grows.
EIS Deferral Relief: How Reinvesting a Capital Gain Defers CGT 2026/27
How EIS capital gains deferral relief works in 2026/27: rolling a taxable gain into an EIS investment, the 3-year holding period, exit rules and interaction with 30% EIS income tax relief.
CGT Annual Exempt Amount 2026/27: £3,000 and How to Use It Wisely
The CGT annual exempt amount has fallen to £3,000 — down from £12,300 just three years ago. Here are the key strategies to make the most of what's left.