The UK Government’s June 2025 update on carried interest tax reform brings long-awaited clarity for fund managers. By dropping two controversial conditions and refining territorial scope, the new regime balances fairness with competitiveness. Shoosmiths’ view: this is a welcome shift that recognises the role of private capital in the UK economy—and gives the industry room to plan with confidence.

Published 26 June 2025

Last Autumn, the UK Government announced significant reforms to the tax treatment of carried interest from April 2026.

On 5 June 2025, they released a further policy update: "The Tax Treatment of Carried Interest - Government Response and Policy Update (June 2025)", which provides important detail on the shape of the new tax regime and its implications for fund managers and the investment management industry.

Notably, the Government has decided not to press ahead with additional conditions to access the new regime, recognising the need to balance fairness with international competitiveness.

Background & key changes

The proposed reforms were announced during the Autumn Budget 2024, aiming to align the tax treatment of carried interest more closely with trading profits to ensure that the tax treatment appropriately reflects the economic characteristics of the reward. As a first step, the carried interest Capital Gains Tax rate increased from 28% to 32% from April 2025.

Under the new regime, from April 2026, carried interest will be subject to Income Tax and Class 4 National Insurance contributions, with a 72.5% multiplier applied to the amount of ‘qualifying’ carried interest, resulting in an effective tax rate of 34.1%.

Consultation & government response

The Government conducted a consultation following the Autumn Budget to explore two additional conditions for carried interest to be ‘qualifying’ under the new regime: a minimum co-investment requirement and a minimum personal holding period between the award and receipt of carried interest. These proposals were widely opposed by industry stakeholders, with the majority of respondents citing concerns over complexity and making the UK tax regime less competitive.

Acknowledging these challenges, the Government has opted not to implement either of these additional conditions due to practical challenges and potential distortive outcomes. For example, HMRC acknowledged that no other carried interest regime has an individual holding period requirement  and an asset level average holding period requirement (which the UK already has).

Following the consultation response, there is now clarity that carried interest will be ‘qualifying’ provided it is not Income Based Carried Interest (IBCI). Broadly, to ensure carried interest is not IBCI the fund must hold its assets for 40 months using a weighted average investment holding period.

Changes to IBCI

The Government has confirmed it will legislate to remove the exclusion for Employment Related Securities (ERS) from the asset-level average holding period condition without any grandfathering for existing structures. Previously, ERS (e.g. carried interest awarded to employees or directors in the fund structure) were automatically excluded. In practice, this meant that many fund managers did not need to consider the holding period condition. The Government considers removing the ERS exclusion will remove inconsistencies in how carried interest was treated, however, in practice it will significantly broaden the scope of the asset level holding period requirement.

The Government has announced that technical amendments will also be made to the average holding period condition to ensure it functions effectively for different fund strategies such as private credit, secondaries, and fund-of-funds.

Territorial scope

As originally proposed under the new regime, non-UK residents would be subject to UK 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.

Mindful of industry concerns around the impact of the new regime on internationally mobile fund managers and uncertainties around the risk of double taxation, the Government has announced limitations to the territorial scope.

For non-UK residents the statutory limitations are as follows:

• Any services performed in the UK prior to 30 October 2024 will be treated as if they were non-UK services and therefore excluded

• UK services performed by a non-UK resident in a tax year in which they spend less than 60 ‘workdays’ in the UK will be excluded

• Carried interest received more than three full tax years after an individual was last UK tax resident or had 60 or more UK ‘workdays’ will be excluded

In proposing the above reforms, the Government wants to ensure that where services are performed in the UK, any reward should be taxed in the UK, fairly and proportionately, whilst preserving the UK’s competitiveness and providing certainty of tax treatment.

Next steps

The Government plans to bring forward legislation for the revised tax regime in the Finance Bill 2025-26. Draft legislation will be published for technical consultation in July 2025.

Comment

The private equity industry has responded with welcome relief to the announcement on 5 June.  After months of speculation and consultation, the proposed position is a far cry from the what the industry might have anticipated when Labour took the reigns on 4 July last year, a time where a number of our contacts in the industry reported that private equity funds were beginning to explore their options in terms of domiciling their funds in different jurisdictions.  The confirmation that the Government will no longer proceed with two of the most contentious proposals: being the mandatory minimum co-investment requirement and an extended holding period condition, demonstrates the Government’s recognition of the practical challenges they posed and the risk of unintended consequences.

Industry feedback during the consultation period appears to have played a decisive role, with many stakeholders warning that such changes could have undermined the UK’s competitiveness as a global asset management hub.  The reforms have been welcomed as a pragmatic balance between ensuring fair taxation and preserving the UK’s appeal to global investors.  By taking such approach, the UK will continue to have one of the more favourable regimes when compared to its European counterparts and potentially also the US, depending on where their proposed reforms shake out in the coming months.

There does appear to be be a general theme emerging that the Labour government is recognising the important role private capital has within the UK economy (as also demonstrated by other legislative measures being proposed by the government in parallel (e.g. the Mansion House Accord)), which no doubt the industry will welcome with open arms.

This reform does, however, mark a significant shift in the tax landscape for carried interest as the Government aims to create a fairer and more transparent system. Following the Consultation response document, fund managers and stakeholders in the investment management industry should begin assessing the potential operational and financial impacts of the new regime if they haven’t already started to do so.

The Government’s engagement and commitment to work with industry stakeholders on the shape and detail of the new regime is welcomed and remains important as the proposed reforms now turn to the technical detail of draft legislation.

Shoosmiths will continue to monitor these developments and provide further updates as the legislation progresses.

For further information or to discuss how these changes may impact your specific circumstances, please get in touch with our Tax team at Shoosmiths.