Investment partners can legitimately avoid Income Tax and National Insurance Contributions (NICs) by having their profits taxed under the Capital Gains Tax (CGT) regime. 

This is a freeview 'At a glance' guide to tax on carried interest.

What is a carried interest?

A 'carried interest' is the share of profits receivable by a general partner of an investment fund by virtue of their ownership of 'an interest' in the fund’s assets. Private equity funds are typically structured as partnerships to align the interests of managers and investors.

How is a carried interest and other profits taxed?

  • The carried interest is subject to CGT. It is taxed as if it were an equity investment.
  • The fund manager's return on their investment is also taxed as capital, as if they were a third-party investor.
  • The investment manager is nevertheless subject to Income Tax on the part of this investment profit that can be shown as fees from self-employment, or if they are engaged via a company employment income. These fees are hard to define, as using the example of the developer, above, the whole profit could, if it were any other business, be taxed as income. It does not take too much imagination to see that these rules are pretty flexible.

What's new?

  • Spring Budget 2023 made proposals to allow UK resident investment managers to make an election to accelerate their tax liabilities in order to align their timing with the position in other jurisdictions, where they may obtain double taxation relief.
  • UK resident individuals who pay tax on carried interest are sometimes unable to claim double taxation relief from other countries because carried interest is recognised and charged to tax at a different time in the two jurisdictions.
  • Legislation was introduced in Finance (No. 2) Act 2023 to insert new sections 103KFA to s103KFE to TCGA 1992. These sections enable any individual who expects to receive carried interest to make a voluntary and irrevocable election for their carried interest to be taxed in the UK on an accruals basis. The legislation provides a calculation for how individuals who have made an election should calculate the amount of carried interest that has accrued to them in each tax year.
  • Elections made under this measure will have effect for the tax year 2022-23 and subsequent tax years.
  • See Policy Paper: Elective accruals basis of the carried interest rules.


  • In the case of Charles Ferguson-Davie and Nick Edwards v HMRC [2024] TC09138, the First-tier Tribunal (FTT) determined that the carried interest "arose in connection with" a disposal occurring after 8 July 2015, the grandfathering provision introduced by F(No2)A 2015 was not in point. The FTT rejected the taxpayers' proposal to apportion the carried interest, where is arose partly in connection with the disposal of asset before 8 July 2015. 

See Charles Ferguson-Davie and Nick Edwards v HMRC [2024] TC09138

Previous changes

Taxing investment managers' fees as income: Finance Act 2015 

Section 21 Finance Act 2015 added a new chapter 5E into ITA 2007.

Sections 809EZA to 809EZH are designed to tax any 'Disguised investment management fees'. Under section 809EZA a fund manager is treated as carrying on a trade and any fee for management of the fund is taxable as income. This was effective in legitimising HMRC's previous treatment of carried interest that, up until 8th July 2015 was based only on a 'gentleman's agreement' in the form of a non-statutory memorandum of understanding agreed between HMRC and the British Venture Capital Association.

Tax rate on the carried interest, just 28%: Finance Act 2016

New clauses were inserted by Finance Act 2016 aimed to beef up the tax charged and ensure that investment fund managers will pay at least 28 percent tax on the economic value of the carried interest they receive. Arm’s length investments made by the fund manager are unaffected.

Squirrel ad

Are you enjoying our content? 

Thousands of accountants and advisers and their clients use as their primary TAX resource.

Register now to receive our FREE weekly SME Tax News update