As part of the 2025 Legislation Day, the government published its much-anticipated draft legislation detailing how the reform to the taxation of carried interest will be applied from 6 April 2026. Here, we summarise the key points within the draft legislation.

The government announced in last year’s Budget that from 6 April 2026, the tax regime for carried interest will be revised and all carried interest will instead be taxed within the income tax framework, treated as trading profits subject to Income Tax and Class 4 National Insurance Contributions (NIC). 

Further details were announced in June 2025 by HM Treasury following the conclusion of their Call for Evidence and the draft legislation has now been published as part of this summer’s Legislation Day, which sets out how the rules will apply from April 2026.   

The legislation, which includes the same definitions in respects of several aspects to the Disguised Investment Management Fees legislation, will form part of the Income Tax (Trading and Other Income) Act 2005 from April 2026. 

The key details of the legislation are: 

Taxation of carried interest as trading profits 

• From 6 April 2026, individuals will be treated as carrying on a trade in respect of all carried interest receipts (both capital and income) and be subject to income tax (up to 45%) and Class 4 NIC (2% over the upper profits limit). 

• Qualifying carried interest will benefit from a 72.5% multiplier, reducing the tax rate to 34.075%. 

Average Holding Period 

• Carried interest will be “qualifying” where it meets the 40-month average holding period test, with tapering applied where the average holding period is between 36 and 40 months. 

• The exclusion for employment related securities from the average holding period will be removed. 

• Changes have been made to the average holding period conditions to ensure they operate fairly and reflect commercial realities. This applies to private credit funds that pursue long-term strategies, fund of funds and secondary funds. 

No additional conditions 

• Despite forming part of HM Treasury’s consultation, additional conditions regarding a minimum co-investment or minimum holding period before carried interest is realised will not be included.  

Territorial scope of the new regime 

The draft legislation provides definitions for workdays and UK workdays to help individuals eligible for the Foreign Income and Gains (FIG) regime determine what sums may qualify for tax relief. Such individuals will be able to apportion between UK and non-UK services, with foreign trading income eligible for the FIG exemption. 

Non-UK residents will only be subject to income tax on carried interest to the extent that investment management services were performed in the UK, meaning internationally mobile individuals will need to carefully track their number of UK workdays each year. 

For qualifying carried interest received, it is proposed that non-UK residents will be subject to statutory restrictions, such that:

• Any services performed in the UK prior to 30 October 2024 (the Autumn Budget) will be treated as if they were non-UK services; 

• the rules disregard any tax year with less than 60 UK workdays; and 

• UK workdays will be ignored once a taxpayer has been non-UK tax resident for three full tax years as long as they did not meet the UK workday threshold in each tax year. 

As currently drafted, there are limited provisions within the legislation for double tax relief, meaning individuals will need to rely on the double tax treaties when claiming relief for non-UK taxes incurred on their carried interest. We anticipate that this will be an area of extensive representation. One example where this could create friction is where carried interest continues to be taxed in another jurisdiction as an investment return, but in the UK the same carry is taxed as trading income. A mismatch in tax treatment could end up creating double tax situations, with little immediate resolution. 

It should also be noted that the above statutory restrictions only apply to qualifying carry. As such, individuals with either non-qualifying carry or a mix of qualifying and non-qualifying carry will need to carefully consider the implications of the time they spend in the UK. 

Anti-avoidance 

As expected, the legislation contains anti-avoidance clauses that look to challenge arrangements. The main purpose, or one of the main purposes of which, is to increase the proportion of carried interest that is qualifying carried interest. 

Other impacts of the new rules 

The government has confirmed that tax due on carried interest under the new regime will be included in the calculation of payments on account due for the following tax year. Individuals will therefore need to consider whether it is appropriate to make claims to reduce their payments on account given the irregular and unpredictable nature of carried interest to avoid overpayments of tax. 

Elections will continue to be available to be taxed in the UK as profits arise (rather than when they are received), with grandfathering for elections previously made. This is intended to allow individuals who are taxable on the carried interest in jurisdictions such as the US on an arising basis to align the timing of the tax charges to facilitate double tax treaty relief claims. 

Although the employment-related securities carve-out from the average holding period rules will no longer apply, the employment-related securities rules will still apply in respect of carried interest acquired by employees and directors. Meaning that in most cases unrestricted market value should continue to be paid and joint s431 elections should be made within 14 days of the award. 

Whilst carried interest reporting should be more straightforward under the new regime, as there will no longer be a need to consider the underlying nature of the carried interest, the average holding period rules will put additional burden on asset managers, many of whom may not have needed to think about this previously. 

What to expect next 

The draft legislation is now subject to an eight-week technical consultation period with comments required in writing by no later than Monday 15 September.  

We expect any changes to the draft legislation to be reflected in the Finance Bill 2026.