In a significant policy reversal, the UK Treasury has retreated from several of its proposed changes to the carried interest taxation regime, vindicating private equity warnings that the measures threatened to undermine UK competitiveness.
Originally unveiled in Chancellor Rachel Reeves’ April blueprint, the reforms included hiking the carried interest tax rate from 28% to 32%, reclassifying gains as income, and introducing stringent qualifying conditions.
However, following strong industry pushback, the Treasury has dropped two major proposals, a mandatory co-investment rule and a minimum waiting period, while clarifying the scope of UK-sourced services.
These adjustments, announced in early June, reflect a calibrated response aimed at preserving the UK’s attractiveness as an asset management hub. Market bodies like the BVCA and fund giants such as Blackstone hailed the concessions as pragmatic, while commentators flagged them as evidence of successful lobbying.
Original Reforms and Key Amendments
At the Autumn Budget 2024, the government shared plans to overhaul the tax treatment of carried interest, profits taken by fund managers when they sell companies, by treating the income as earnings rather than capital gains.
From April 2026, carried interest would be taxed under income tax rules, with a special 72.5% multiplier applied to calculate 'qualifying' gains. This approach results in an effective rate of 34.1% for high earners, still below the top marginal rate of 45%, but a marked departure from the standard 28% capital gains rate. However, the chancellor also proposed two controversial qualifying restrictions:
- A co-investment threshold, requiring executives to invest their own capital alongside fund investments.
- A minimum holding period, extending beyond the existing ~40-month requirement to further secure preferential tax treatment.
June Concessions: What Was Dropped
On June 5, Treasury officials officially withdrew both the co-investment requirement and the individual holding-period rule following intense industry consultation. These measures had threatened to complicate fund structures and make the UK less appealing to private equity operators.
Instead, the government will rely on the existing asset-level average holding period condition, which mandates roughly 40 months before gains qualify for reduced tax, a rule widely accepted as sufficient
Territorial Taxation: Narrowing the UK Scope
The Treasury also refined proposals concerning non-UK resident fund managers. Previously, managers performing UK-based services, even temporarily, risked being taxed as UK income. In response to feedback, the government now confirms:
- Any services provided before October 30, 2024 are not counted as UK-sourced.
- Only non-residents working 60 or more UK days per tax year will be taxable on UK-sourced carried interest.
- Non-resident individuals must have performed the services within the three years before the payment to qualify
These measures aim to protect long-term ex-pats and align with double tax agreements, though concerns remain about possible double taxation
Stakeholder Feedback
The British Private Equity & Venture Capital Association (BVCA) described the updated draft as "pragmatic," praising the lightening of burdensome qualifying conditions. Michael Moore, BVCA CEO, said the Treasury had considered the implications for growth and competitiveness.
Meanwhile, Blackstone and other private equity firms welcomed the move as “a victory for clarity and pragmatism.” Tax Policy Associates labeled the retreat a “significant climbdown” driven by strong lobbying. Freeing fund managers from forced co-investment and extended wait times restores a level of predictability in compensation planning.
Administrative and Competitive Considerations
Officials emphasised that the concessions are "technical," aimed at clarifying implementation, not reversing the March-April 2026 effective date.
The rolling legislative phase now involves a technical working group, comprised of over 50 stakeholders, tasked with refining draft clauses ahead of Finance Bill 2025‑26. Proposed changes also include streamlining rules for credit and direct lending strategies, expanding short-term investment exemptions, and adjusting payments-on-account calculations.
Broader Implications for UK Policy
This reversal underscores the UK government's sensitivity to economic competitiveness and lobbying pressure. By reversing overly stringent conditions, the Treasury signals commitment to preserving London’s status as a premier asset-management centre.
But with the broader shift to taxing carried interest as earnings, questions linger about the UK's tax appeal compared to other jurisdictions. The amendments may set a precedent a future tax reforms may increasingly follow a consultation-driven approach to avoid missteps.
Conclusion
The Treasury’s June concessions signal a delicate balancing act, delivering on manifesto promises while preserving the UK’s attractiveness as a global financial hub. Dropping co-investment and holding-period conditions preserves structural flexibility, and refining territorial scope relieves the burden on expatriates.
Yet, shifting carried interest into the income tax framework still raises questions about whether the UK can offer competitive returns. As legislative details are fleshed out in the technical working group, Treasury must ensure a clear, efficient system capable of bolstering investor confidence without undermining public legitimacy.
The outcome may shape the future of asset management and tax policy in the UK, setting a template for consultation-driven reform.
Frequently Asked Questions
What is “carried interest”?
Carried interest is the share of profits received by private equity fund managers when they sell successful investments—historically taxed as capital gains at a lower rate than income.
What changes were proposed by the Treasury?
The initial plan increased the tax rate from 28% to 32%, reclassified gains as income, and added qualifying conditions for investors to benefit from reduced rates.
What concessions were made on June 5, 2025?
The mandatory co-investment rule and extended individual holding-period were dropped. Territorial scope was narrowed to only UK-based services post-Oct 30, 2024, with a 60-day minimum.
What are the next steps?
Draft legislation detailing technical rules will be published, with ongoing stakeholder discussions through a formal technical working group ahead of the Finance Bill 2025‑26.
Why does this matter to private equity?
Tax clarity affects executive rewards, fund structure design, and the UK’s competitiveness. These concessions ensure the reforms don’t disrupt investment incentives or push firms elsewhere.
