HMRC have published 'The tax treatment of Carried Interest - Government response and policy update (June 2025)'. This includes feedback to the consultation published in October 2024, which explored possible amendments to the qualifying conditions for carried interest. Two key proposals have been dropped.
Background
At the 2024 Autumn Budget, proposals to reform the tax treatment of carried interest were announced.
A key aspect of reforming carried interest taxation is determining what qualifying conditions should apply to the revised tax regime. The consultation considered an aggregate minimum co-investment requirement and a minimum holding period condition.
An Earlier consultation on the reform of the tax treatment of Carried Interest highlighted several challenges associated with implementing the co-investment requirement, particularly on an individual-by-individual basis. The government was therefore proposing that the co-investment requirement would only be implemented at the 'team level'.
The government had proposed a new minimum waiting period for a fund manager to qualify for the 34.1% tax rate (it was 40 months). This proposal has also been dropped.
Responses
The majority of the responses opposed the introduction of the requirements, with areas of concern including:
- The introduction of the requirement would be overly complex and impractical.
- Several respondents highlighted that there is already an expectation for fund managers to co-invest alongside investors to ensure alignment of all parties, therefore, the government should not intervene in the operation of the market.
- New firms entering the market may find themselves at a competitive disadvantage due to a lack of available capital to make material co-investments into their first fund.
The response to the introduction of a minimum holding period between award and payout was similarly opposed. Respondents highlighted:
- The current average period between reward and receipt varies significantly from fund to fund, depending on investment strategy and asset portfolio, making it difficult to establish a reasonable minimum time period.
- Unless specific provisions were made for various situations, many individuals could be unfairly excluded from qualifying for carried interest treatment.
- The UK market may become less competitive compared to other regimes, as no other carried interest regime has a minimum time requirement.
Both conditions brought challenges, resulting in an overly complex regime.
The government has decided not to implement either of the requirements.
Other changes
The government's continued work with businesses, advisory firms and professional bodies has resulted in some other issues being raised.
Average Holding Period (AHP) condition:
- For individuals who hold Employment-Related Securities (ERS), the current exemption from the AHP condition will be removed.
- Amendments will be made to the AHP in the following areas:
- The direct lending of funds.
- The specific provision for loan-to-own strategies will be removed for all types of credit funds.
- A new bespoke credit fund provision will be introduced.
- Unwanted short-term investments.
- Various other technical issues will be addressed, including the tax treatment of distributions made by funds.
- The overall aim of the various amendments is to ensure AHP operates fairly and does not create inconsistent or distorted outcomes for particular investment strategies.
Territorial scope of the revised regime:
- The government has been clear that carried interest is a reward for the provision of investment management services. Where the services are performed in the UK, the reward should be taxed in the UK.
- The government has also recognised that there are some uncertainties relating to other jurisdictions' approach to the application of Double Taxation Agreements. It, therefore, aimed to introduce three statutory limitations to avoid the possibility of double taxation.
- Services performed in the UK before 30 October 2024 will be treated as non-UK services, providing proportional transitional rules.
- A new 60-day workday threshold will be introduced. Any individual who is neither a UK resident for tax purposes nor meets the 60-day threshold will see their services performed in the UK treated as non-UK services.
- Any UK-performed services will also be treated as non-UK performed if three full tax years have passed, in which time the individual was neither UK resident for tax purposes nor met the UK workday requirement.
Payments on account
A particular query that arose from respondents related to payments on account. Where payments on account are due, they are calculated with reference to an individuals total Income Tax and Class 4 NIC's which includes any tax calculated on carried interest.
While the government understands that carried interest payments are irregular and unpredictable, they will continue to form part of the calculation for payments on account. Individuals can claim a reduction on payments on account where needed.
Next steps
The government will publish draft legislation for technical consultation before the summer recess.
Useful guides on this topic
Carried Interest
What is carried interest? When does carried interest arise? How is carried interest taxed?
Carried Interest tax reform and qualifying conditions
Following the Government's announcement of proposals to reform the tax treatment of carried interest, HMRC have published the summary of responses for their call for evidence on 'The Tax Treatment of Carried Interest' and detail of 'Next steps', which include the publication of a new consultation to consider the qualifying conditions.
National Insurance: Rates
What are the current National Insurance rates? What rates will apply to next year?
Allowances & rates: Capital Gains Tax (CGT)
What are capital gains? What is Capital Gains Tax (CGT)? What are the Capital Gains Tax rates, bands, reliefs and exemptions?
Disguised investment management fees
This guide looks at changes in the taxation of investment managers' fees.
External link
The tax treatment of Carried Interest - Government response and policy update (June 2025)