The UK's treatment of carried interest is about to change in a big way. Starting 6 April 2026, carry will no longer be taxed as capital gains. It will be reclassified as trading income, subject to income tax and National Insurance [1]. This is the biggest shift in how fund managers are taxed in the UK in decades, and every emerging manager launching a fund in 2026 or beyond needs to understand exactly how it works.
I have been working through the implications with our GP clients for months. The short version: if your fund achieves the right average holding period, you get a 72.5% reduction that brings the effective rate to about 34.1%. If it does not, you are looking at up to 47%. The difference between those two numbers is the difference between a competitive compensation structure and one that drives talent out of London.
How carry was taxed before
Until April 2025, carried interest in the UK was taxed as capital gains at 28% (the rate that applied to most carry after earlier CGT rate changes) [1]. The argument for capital gains treatment was that carry represents a return on the GP's capital investment in the fund plus the value created through investment management. Critics argued it is really compensation for services and should be taxed as income at rates up to 45% plus National Insurance.
That debate has been going on for years. The government has now resolved it, in favour of reclassification.
The April 2025 transitional period
The transition started on 6 April 2025. During the one-year bridge period from April 2025 to April 2026, carried interest remained subject to capital gains tax but at an increased rate of 32% [1][2]. This was a four-percentage-point increase from the previous rate, signalling the direction of travel.
The transitional rate applied only to carry actually received during that twelve-month window, not to the entitlement itself [1][2]. This created predictable timing behaviour: some managers pulled forward exits and distributions to lock in the 32% rate before April 2026. Others delayed distributions hoping for clarity on the post-April 2026 rules. Both strategies carried risk.
What happens from 6 April 2026
From April 2026, carried interest is taxed as profits arising from a "deemed trade" where the individual performs or has performed investment management services in respect of a fund [2]. The carry recipient is treated as conducting a trade, and the carry payment is treated as a trading profit. Income tax applies at marginal rates (20% basic, 40% higher, 45% additional) plus 2% Class 4 National Insurance for higher earners. The theoretical combined top rate is 47%.
That would be punishing. So the government introduced a relief mechanism: qualifying carried interest receives a 72.5% reduction in the amount subject to tax [1][2]. Instead of the full carry amount being taxed as trading income, only 27.5% of it is. Run the maths at the 45% additional rate plus NI, and you land at an effective rate of approximately 34.1% on qualifying carry.
The word "qualifying" is doing all the heavy lifting in that sentence.
The average holding period condition
Whether your carried interest qualifies for the 72.5% reduction depends entirely on your fund's average holding period across its investments [2]. This is the Average Holding Period Condition (AHPC), and it is the single most important variable in the new regime.
40 months or more: All carried interest is qualifying. You get the full 72.5% reduction, landing at the ~34.1% effective rate.
Between 36 and 40 months: A portion of the carried interest qualifies. The relief tapers linearly between these thresholds.
Below 36 months: No carried interest qualifies. You pay full income tax plus NI -- up to 47%.
For most venture capital funds, the AHPC is not a problem. VC investments typically have holding periods of five to ten years. The 40-month threshold is well within normal range. But for buyout funds with faster exit timelines, turnaround strategies, or opportunistic vehicles, the AHPC creates a genuine constraint. Your investment thesis now has tax consequences baked into it.
Unwanted short-term investments
The government recognised that rigid application of the AHPC could penalise funds for circumstances outside their control. Recent guidance clarifies that "unwanted short-term investments" -- those disposed of within 12 months despite a genuine intention to hold longer -- can be excluded from the average holding period calculation [2]. This covers situations like forced exits due to portfolio company distress, regulatory requirements, or M&A events the fund did not initiate.
Parts of individual investments can also qualify as unwanted short-term disposals. If you sell a portion of a holding early (say, in a secondary transaction to manage liquidity) while retaining the rest long-term, the early disposal can potentially be excluded from the AHPC calculation.
This flexibility matters. Without it, a single unplanned early exit could drag down your fund's average and cost every carry recipient a lot more in tax.
International dimensions
For managers who are non-UK resident or newly arrived in the UK, additional rules apply. The Foreign Income and Gains (FIG) exemption is available for individuals new to UK tax residence, providing a four-year window with certain protections [1]. The interaction between the new carry rules and UK/non-UK residence status adds complexity that requires specialist tax advice.
Fund-of-funds structures also create planning considerations. If your fund invests through intermediate vehicles, the holding period calculation for the underlying investments needs to flow through correctly to your carry structure. This is not automatic -- it requires careful documentation.
Impact on fund economics
The standard "2 and 20" model (2% management fee plus 20% of profits as carried interest) does not change. What changes is how much of that 20% the GP team keeps after tax. Under the old regime, a GP receiving GBP 1 million in carry paid roughly GBP 280,000 in tax and kept GBP 720,000. Under the new regime with qualifying carry, the tax is approximately GBP 341,000 and the GP keeps GBP 659,000. That is a 8.5% reduction in take-home carry.
If the carry does not qualify because the fund's average holding period falls short, the tax jumps to approximately GBP 470,000 on that same GBP 1 million. That is a 26% reduction compared to the old regime. For a GP team that is already taking below-market salaries in the early years of a fund, that difference directly affects their ability to sustain the business while the fund matures.
Emerging managers need to model these numbers explicitly when setting fund terms, negotiating co-invest allocations, and structuring their carried interest vehicles. The days of treating carry tax as a back-of-mind issue are over.
Documentation and compliance
The compliance burden is heavier than before. HMRC now recommends that carry recipients include explanatory disclosure notes in their tax returns, provide supporting computations showing how carry figures were calculated, and attach copies of any "tax packs" provided by the fund [1]. These recommendations are technically non-mandatory, but taxpayers who skip them face higher likelihood of compliance checks.
For fund managers, this creates a practical obligation: you need to produce carry calculation packs for your team and co-investors that document the AHPC computation, the qualifying status of each carried interest payment, and the basis for any unwanted short-term investment exclusions. This is not something you can do on the back of an envelope.
What emerging managers should do now
- Review your fund documents. Your LPA and carry allocation provisions need to reflect the AHPC requirements. If your fund was formed before the April 2026 changes, check whether amendments are needed.
- Align your investment strategy. If your target holding period is close to the 36-40 month boundary, you have a decision to make about whether to adjust your strategy or accept the tax leakage on non-qualifying carry.
- Build carry tracking infrastructure. You need systems that calculate and report the average holding period on an ongoing basis, not just at fund wind-down. This is an operational requirement, not a nice-to-have.
- Engage tax advisers early. The interaction between the new carry rules, your fund structure, and your personal tax position is too complex for general guidance. Get specific advice before you finalise fund terms.
- Plan exit timing deliberately. The AHPC means exit timing now has direct tax consequences for your carry. Factor this into investment committee discussions from the start.
How Infra One helps with carry tracking and compliance
We built our fund administration platform to handle the operational side of these changes. For every fund we administer, we track holding periods at the investment level, calculate the running average for AHPC purposes, and produce the carry documentation that GPs and their tax advisers need for compliance. When it comes time to produce tax packs for carry recipients, the data is already there: calculated, audited, and ready to go.
If you are launching a UK fund and want to make sure your operations are set up for the new carry regime from day one, talk to us.
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