Carried Interest Reform: The Tax Change That Lands on HR's Desk
The UK’s carried interest reform, which came into force on 6 April 2026, changed the way an investment manager’s carry is taxed. While fundamentally a tax change, the new rules create a significant operational demand: fund managers need to be able to produce accurate data on investments, an individual’s UK workdays, the split between carry and co-investment, and the calculation of returns. In practice, much of this sits with HR departments and fund administrators. For those teams, responding effectively will depend on having the right platform in place, supported by expert tax advice.
When the captain of a 16th Century ship sailing for Asia or the Americas was negotiating his share of the profits from the cargo – his “carried interest” – he probably wasn’t thinking about how many UK workdays he and his crew would be performing to complete the task (presumably not many).
He probably didn’t want to think about average holding periods: “average”, in the context of holding cargo, was a word that only arose in the event of disaster; a fair way of sharing the losses in the event part of the load had to be thrown overboard in a storm.
Until recently, back offices and HR administrators were in a similar position. Questions about how many days a non-resident fund manager had spent working in the UK, or the average holding period of investments were not matters that required much attention.
But under the new rules on carried interest, which came into force on 6 April 2026, answers to these questions must be available and can directly shape how a fund manager’s carried interest is taxed.
The UK’s Carried Interest reform is, first and foremost, a tax change. But its consequences reach well beyond the tax function. Meeting the new rules depends on data – award dates, vesting events, residence and workday records – that sits with HR departments and fund administrators, making them central to a process their fund managers, and ultimately HMRC, will rely on.
Carried Interest, or “carry”, is the profit share paid to investment managers once investors have received their capital and a preferred return. Until recently, in the UK it was taxed based on the nature of the underlying returns – typically capital gains – albeit subject to a minimum tax rate (32% in the 2025/6 tax year).
From April 2026, carry is treated as trading profit, subject to income tax and Class 4 National Insurance contributions (NICs). “Qualifying” carry is adjusted by a 72.5% multiplier, resulting in a top tax rate of around 34.1% for participants; carry that does not qualify is taxed at up to 47%. The rules determining qualifying carry are complex and impose a significant evidence burden.
Most carry recipients will be impacted – and importantly, the new rules are now relevant to overseas-based participants who spend some of their time working in the UK. The rules are drawn widely, and they apply to existing carry schemes as they pay out, not just new schemes.
Often, although not a requirement to benefit from the qualifying carry rules, carry schemes are associated with co-investment arrangements whereby firms and investment team members invest their own money alongside external investors. The tax treatment of returns from co-investment is not changed, meaning that the tax is still based on the nature of the underlying returns.
For fund managers, and their HR and administration teams, this is not a one-off exercise in reading the legislation. It’s an ongoing operational task – capturing the right data, keeping it current and producing it on demand, with tax advice to steer it. In practice, this breaks down into a handful of distinct demands.
1) Proving the rate: average holding periods
Whether carry qualifies for the reduced rate turns, broadly, on how long the fund holds its investments. An average of at least 40 months qualifies in full; 36 to 40 months earns partial relief; anything below 36 months qualifies for none.
“Broadly” is doing a lot of work here. The figure is a weighted average (by size of investment) of the holding periods of the investments in a fund, supplemented by specific rules (differing by asset class – venture capital, private equity, real estate, credit, fund of funds) that can deem extended average holding periods for investments made or disposed of in stages. Holding entities are (normally) looked through. Additional rules govern the treatment for derivatives and hedging. There are cases where the intentions behind investment decisions must be demonstrated through contemporaneous documentation.
The rules allow “conditionally qualifying” carry, which is taxed at the reduced rate before the test is met (on the assumption it will be), with a top-up charge if not.
Carry participants claiming the reduced rate will need to be able to produce the workings if HMRC asks.
As the amounts and timings of individual investments may be commercially sensitive, firms will need to consider carefully what data should be shared with participants, and to balance the benefits of the reduced tax rate against these sensitivities, particularly for individuals outside the core investment team who might not otherwise be privy to this information.
This is a data exercise as much as it is a question of interpretation. It relies on the acquisition and disposal date of every relevant investment, including those held indirectly. With that data in place, and other supporting information, the average holding period can be calculated and the qualifying position settled – with tax advice to guide.
2) People who move: tracking UK workdays
The new rules apply to both UK resident and non-UK resident carry participants, if they perform at least part of their investment management services in the UK. If participants spend at least 60 UK workdays in a tax year (defined as any day in which three or more hours of work are performed in the UK) during the lifespan of the carry scheme, then part of their carried interest is potentially subject to tax on a proportional basis.
To help individuals comply with their tax obligations, firms are expected to track each overseas-based individual’s UK workdays, on a calculation methodology that differs from the normal Short Term Business Visitor PAYE rules. Existing tracking systems were not designed for this and will need adapting.
As UK workdays from 30 October 2024 (the day the carried interest reforms were first announced) need to be taken into account, firms that have not implemented such systems yet will need to consider what data and evidence can be gathered now.
Additional considerations will need to be made for employees moving abroad or coming to the UK during the life of the carry scheme.
While in many cases an individual participant may be able to claim an exemption under a double taxation treaty, there will remain a UK tax filing obligation. Affected individuals are likely to need specialist UK tax advice.
For global funds whose overseas-based managers frequently travel to the UK, this is where a UK reform becomes a cross-border issue.
The implications need to be clearly communicated, since those overseas managers may not be aware of the consequences. While business needs should normally prevail over tax planning, firms may want to consider, especially at the margins, whether travel to the UK is necessary.
The most forward-thinking firms will implement real-time tracking so individuals can be warned as they approach the 60-day threshold (and other relevant limits) in a tax year, allowing them to manage their tax, and tax filing, exposures before it is too late to do anything about it.
3) The edges: disguised investment management fees, late grants and co-investment
The existing rules applicable to disguised investment management fees (DIMF), and employment related securities, continue to apply. However, the rules contain provisions preventing double taxation of the same amounts.
There is a potential employment tax implication on the grant of carried interest, however carry granted sufficiently early in a fund’s life can usually be valued at the price paid (effectively resulting in no employment taxes being payable). If carry is granted later, after the fund has begun to generate gains, a market value must be established on which employment tax due under PAYE can be determined. This is a complex exercise, and the firm’s records are the only sound basis for it.
Co-investment sits outside the carry rules and so should be tracked and cleanly separated, with taxable income and gains calculated under normal UK tax principles.
In each case, the records have to be in place – the valuations, the income and gains arising, co-investment entitlements, the carry waterfall – and the tax treatment follows from them.
4) The tax pack: increasing demands on HR
Individuals must disclose and pay the tax and NIC on their carry and co-investment through self-assessment, and will turn to their employer for the figures. Employers are not statutorily obliged to provide them, but it is usually in their interest to do so. They often hold the only reliable record of the data, and inconsistent numbers across current and former executives invite errors and HMRC checks that rebound on the firm as much as the individual. HMRC guidance confirms that where HMRC is provided with a copy of a well-prepared tax pack, this will reduce the likelihood of compliance checks for individuals.
HMRC recognises that, particularly in the context of international firms and complex fund structures, the information necessary to accurately determine the taxable amounts arising – especially in relation to returns on co-investment – may not be readily available. While errors in reporting do not change the individual’s responsibility to pay the right amount of tax, penalties for errors will not be imposed if HMRC accepts that individuals have taken reasonable care – which may include relying on a tax pack provided by their employer. However, this creates an expectation that the employer has taken reasonable care in preparing the data. HMRC has a high standard and historically common approaches, such as relying on figures from a US K-1 form without further analysing the UK tax treatment, for example, will no longer cut it.
HR teams may have been used to preparing such packs in the past, however in the new world the different treatments of co-investment, and qualifying, conditionally qualifying and non-qualifying carry, means a significantly greater level of detail is likely to be required for individuals to demonstrate that they are declaring the correct amount of tax.
This summary is only as good as the data feeding it: the key dates for every award (grant, vesting, lapse, exercise) and the attributes that affect an individual’s position, such as UK tax residence, citizenship and relevant elections. Capturing this from the outset, in a system built to produce it, is what turns a scramble at filing time into a routine report.
Two capabilities, working together
Across all four demands, the same pattern holds: getting the tax right requires having the right data in place.
Given the wide range of investment strategies in alternatives funds, and individual circumstances, the specific data requirements will differ for every firm and potentially each fund – so tax data requirements, and the design of the platforms to hold, process and deliver the information and supporting evidence, should be an integral part of the tax considerations taken into account in designing carried interest arrangements.
A data platform with no tax expertise behind it produces tidy records of the wrong things; tax expertise with no platform behind it has nothing to work from. The firms that come through this comfortably are the ones that build both, before the next distribution makes the gap obvious.
This article is co-authored by Christopher Austin, Partner and international structuring and investment specialist at WTS UK, and EWM Global, a specialist provider of incentive compensation administration for financial services firms globally.
Please fill out the contact form below for more information about how the right operational infrastructure can help your firm navigate these challenges, or contact Christopher directly to hear more about the tax implications.
