On 5 June, HM Treasury published its response to the October 2024 Next Steps and Consultation on the tax treatment of carried interest, confirming its intention to legislate for a rules-based income tax regime that provides greater clarity and certainty for fund managers and investors.

We welcome the confirmation that the average holding period test will remain the core qualifying condition for the modified income tax treatment and that no new co-investment or individual-level holding period requirements will be introduced. The government has responded constructively to industry feedback, which highlighted the operational complexity and limited benefit of such changes.

Key policy outcomes

No new co-investment requirement

• The government will not introduce a mandatory co-investment threshold, noting existing widespread practice and concerns about distortion and complexity.

No new individual holding period

• A proposed individual-level holding period test has also been ruled out. The 40-month average holding period test will remain the central test for capital gains treatment as existing protections relating to the award of carried interest were deemed sufficient.

Clarifications and technical updates

• Asset holding period (AHP) refinements:
  Direct lending funds will no longer automatically be treated as failing the holding period test. New timing rules (T1/T2) will improve the treatment of debt origination in private credit strategies. The update also includes accommodations for loan-to-own approaches, fund-of-funds, secondary funds, mandatory short-term disposals, and tax distribution mechanics.
• Territorial scope rules clarified:
  For non-residents, carried interest will be taxable in the UK based on where investment management services are performed, apportioned using UK workdays. Safe harbours include:
  • Services provided before 30 October 2024 will be treated as non-UK.
  • Years with under 60 UK workdays will not trigger UK tax.
  • No UK tax will arise where three full tax years (without tax residence or 60 UK workdays) have passed since UK departure.
  • Double tax treaty protections will remain available where applicable.
• Payments on account:
  Carried interest treated as income will factor into payment-on-account obligations, and Individuals with irregular carry income can continue to claim adjustments under existing rules.

Next steps
Draft legislation will be published before the summer recess, with the full regime to be legislated in the Finance Bill 2025–26. The clarified framework should give members an understanding of the tax treatment of carried interest in the UK, and operational costs which may arise from implementation, particularly around asset tracking and statement provision.

For question or further information please contact Nicholas Smith ([email protected])