Key points
On 4 December 2025, the UK government published revised draft legislation for the new carried interest regime. While the core design of the legislation has not changed from the initial draft, the revised legislation includes helpful clarifications and amendments.
This Client Alert highlights the principal changes and offers practical takeaways for UK-based asset managers and non-UK based asset managers who regularly come to the UK or are considering establishing an office in the UK. For an overview of the regime, see this Latham Client Alert.
Beginning 6 April 2026, sums arising in respect of carried interest will be taxed as profits of a deemed trade where an individual performs, or has performed, investment management services in any tax year directly or indirectly in respect of a fund.
The revised draft legislation clarifies that there will be a separate deemed trade per arrangement. In practice, an individual may have multiple deemed trades in a given year which need to be reported on their tax return, although this is not expected to alter the overall UK tax burden.
The mechanics for calculating deemed trading profits are substantively unchanged, but a “permitted deduction” now includes consideration in money or money’s worth given wholly and exclusively for the entitlement to carried interest — though it expressly excludes the provision of investment management services. This is a welcome expansion from “cash only” in the initial draft legislation.
The revised draft legislation also introduces an election to disapply the carried interest rules where, ignoring those rules, the relevant amounts would be brought into account as ordinary trading income. This election allows taxpayers, in appropriate cases, to be assessed under ordinary principles rather than the carried interest regime. In addition, the revised draft legislation contains clearer protections against double UK taxation (with express reference to National Insurance contributions) and facilitates consequential adjustments where tax has already been paid on an accelerated basis. It also contemplates unilateral relief for foreign taxes corresponding to capital gains tax.
Under the revised draft legislation, the definition of “carried interest” remains consistent with the existing rules on carried interest. However, the definition of “tax distribution” has been broadened to address concerns raised in the consultation. We expect the broadened definition to catch most tax distribution concepts commonly seen in limited partnership agreements (LPAs).
UK residents will generally be subject to tax in the UK on the full amount of any sum arising to them in respect of carried interest. A non-UK resident will be subject to UK income tax on the profits of their deemed trade allocable to UK activities, unless an exclusion applies, and subject to the terms of any applicable double tax treaty. The revised draft legislation includes specific rules governing the allocation of profits from Qualifying Carried Interest to the UK on the basis of “workdays”. In particular, the portion of qualifying and non-qualifying profits treated as arising from a trade carried on in the UK is the portion of “applicable workdays” (as defined) which are “UK workdays” (as defined).
Any deemed profits arising from Qualifying Carried Interest will be adjusted downward by applying a 72.5% multiplier, resulting in an overall highest marginal effective tax rate of about 34.1%. Broadly, the percentage of carried interest that will be Qualifying Carried Interest will depend on the extent to which the fund satisfies the AHPC. Where a fund’s average holding period across its investments is between 36 and 40 months minus one day, a portion of the carried interest received will be “qualifying”. Where a fund has an average holding period of 40 months or more, all carried interest received will be “qualifying”.
The revised draft legislation retains the helpful limits on UK taxing rights for Qualifying Carried Interest. It does not, however, extend those limits to non-Qualifying Carried Interest. In the consultation, the industry expressed concern that knowing whether carry will meet the conditions to be qualifying may not be clear until after the relevant period (during which a non-UK manager’s relevant UK activities would be tested) has begun. Given this concern, the revised draft legislation effectively extends the 60 UK workday threshold to non-Qualifying Carried Interest if, at the time of the first UK workday in the relevant period, it was reasonable to assume that the carry would be Qualifying Carried Interest.
In broad terms, where a non-UK resident limits UK workdays to fewer than 60 in a tax year and, on the first UK workday in the relevant period, it is reasonable to assume the carry will be qualifying, those UK workdays should not count towards the territorial attribution of non-qualifying profits. This amendment will be useful when unforeseen events cause a fund to fall below the average holding period threshold, but does not go as far as industry had hoped.
The number of UK workdays is tested against the number of workdays in the “relevant period”. The revised draft legislation clarifies the definition of “relevant period” so that it now operates on a more objective basis. To summarise:
Under this revised definition, it should generally be fairly straightforward to determine when the period starts and ends (which was not the case with the original definition). However, managers should note that, under this definition, the relevant period will often begin before carry is granted (as carry schemes are often not set up until final close). As such, managers may need to start tracking their workdays before they receive any carry.
This approach also resolves the anomalies that would have arisen under the initial draft legislation with regard to an individual changing employers or moving between different fund arrangements during the relevant period.
Whether carry is Qualifying Carried Interest depends on the fund’s average holding period, measured by reference to the statutory rules governing the timing of acquisitions and disposals and subject to targeted modifications. Where the average holding period is at least 40 months, all carry is qualifying; between 36 and 40 months, a graduated proportion qualifies.
Below are notable amendments to the AHPC under the revised draft legislation:
The rules on unwanted short-term investments have been relaxed. The revised draft legislation removes the condition that unwanted short-term investments must comprise less than 25% of fund capital. Further, parts of a single investment can constitute an unwanted short-term investment, and an unwanted short-term investment can be disregarded for the purposes of the AHPC where there was a firm, settled, and evidenced intention to dispose of the investment in full or part within 12 months even if actual disposition occurs later. These changes better reflect commercial deal structures and reduce cliff-edge outcomes.
The specific timing and disposal provisions for debt investments are no longer confined to “credit funds” and now apply to any investment scheme holding debt investments. The revised draft legislation broadens the definition of “debt investment” (including to cover assets representing relevant non-lending relationships) and clarifies that commercially motivated restructurings, extensions on substantially the same terms, or transactions where economic exposure remains substantially the same do not trigger deemed disposals. These changes should materially improve the operability of the holding-period test for strategies with meaningful credit exposure.
Additionally, early repayment protections are more clearly framed: Early repayments by debtors are generally ignored for holding-period purposes provided the fund had the ability and intention to hold to maturity and the borrower’s decision was not influenced by the qualifying carry rules. However, where, at any time before early repayment, the fund lacked the ability to hold to maturity or intended to exit early, the protection will not apply.
In addition to the changes to the rules on debt investments, the revised draft legislation expands the definition of “credit fund” to accommodate a broader set of financing arrangements, including alternative finance arrangements and creditor repos/quasi repos.
The revised draft legislation refines the conditions to reduce opportunities for managers to artificially manufacture “fund of funds” treatment through intra manager structures.
While many of these amendments are helpful, sponsors may wish to reconsider the revised funds of funds conditions and reassess existing warehouse or platform arrangements against the new independence criteria.
With the new regime set to take effect on 6 April 2026, non-UK resident carry recipients should ensure that robust workday tracking processes are in place including, where applicable, looking back to workdays since 29 October 2024. Further, while the revised AHPC has been improved, the rules are still likely to be administratively burdensome in practice.