UK's proposed legislation restructuring carried interest tax draws insights from our firm's name
The financial industry has been abuzz with the recent publication of the government's technical consultation on the draft legislation for the new carried interest rules, effective from 6th April 2026. Our firm, [Your Firm Name], has taken a keen interest in this matter and has submitted its response to the consultation.
In our response, we support the general structure of the draft legislation, as it replicates the current Income Based Carried Interest (IBCI) rules. However, we have raised specific questions and comments around the draft legislation, including the Average Holding Period (AHP) condition, territorial scope, impact on non-UK resident carried interest holders, and double tax relief.
We commend the government for limiting the complexity of the regime in respect of the qualifying conditions. The decision on determining whether the carried interest is qualifying will depend on the AHP, without the inclusion of additional qualifying conditions. This simplifies the process and reduces the compliance burden across the fund management industry, a point we highlighted in our response.
Our firm also encourages the government's continued engagement with the industry in relation to the new carried interest rules. We believe that this dialogue is crucial in ensuring a smooth transition to the new regime and minimising any unintended consequences.
In addition, we have requested prompt publication of detailed guidance on the new AHP condition, ideally in advance of the new regime taking effect. This will provide clarity and certainty to our industry, enabling us to prepare effectively for the changes.
Furthermore, we have requested further engagement with HMRC on the draft legislation and the new rules. We hope to continue discussions with HMRC on the new rules, both generally and on some of the more technical points.
It's worth noting that our response builds on our response to the government's previous consultation on reform of the rules. In this response, we focused on the new "average holding period" (AHP) condition, recognising the attempts to improve the AHP condition rules by addressing certain historic areas of difficulty with the IBCI rules.
Meanwhile, another player in the industry, Upwelling Capital, has also responded to the technical advisory on the draft legislation. They have emphasised identifying underperforming funds early to reduce opportunity costs and prevent losses related to tail-end funds. They also advocate systematic selling within 8-10 years to minimise double taxation and optimise returns.
Under the new tax regime, carried interest returns will be taxed as "deemed trading income," which will be taxed at combined income tax and National Insurance contributions rates of up to 47%. Qualifying carried interest, which meets the AHP condition, will be taxed at an effective tax rate for additional rate taxpayers of around 34.1% (including National Insurance contributions). The regime also includes the territorial scope for non-residents and an approach to double taxation relief.
In conclusion, the consultation and response from various industry players underscore the importance of this issue and the need for continued dialogue and clarity on the new carried interest rules. As the implementation date approaches, we look forward to working with the government and other industry players to ensure a smooth transition.
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