Legislation – Finance Act 2026

“Carried interest

23ITax treatment of carried interest

(1)

This section applies where—

(a)

an individual performs investment management services in any tax year directly or indirectly in respect of an investment scheme under any arrangements, and

(b)

under the arrangements, one or more sums of carried interest arise to the individual from an investment scheme in a tax year.

(2)

For income tax purposes—

(a)

the individual is treated as carrying on a trade, by virtue of the arrangements, for the tax year referred to in subsection (1)(b),

(b)

the amount to be treated as the profits of the trade for that tax year is the sum of the non-qualifying profits of the trade and 72.5% of the qualifying profits of the trade (see subsection (3)), and

(c)

the individual is treated as the person receiving or entitled to those profits.

(3)

In subsection (2)(b)—

(a)

the amount of the non-qualifying profits of the trade is—

(i)

the total amount of carried interest arising to the individual from any investment scheme in the tax year under the arrangements that is not qualifying carried interest, minus

(ii)

the proportion of any permitted deduction for the tax year (see section 23N) that is the same as the proportion of the total amount of carried interest that is not qualifying carried interest;

(b)

the amount of the qualifying profits of the trade is—

(i)

the total amount of qualifying carried interest arising to the individual from any investment scheme in the tax year under the arrangements, minus

(ii)

the proportion of any permitted deduction for the tax year that is the same as the proportion of the total amount of carried interest that is qualifying carried interest.

(4)

In Schedule A1—

(a)

Part 1 explains what it means for a sum arising to an individual from an investment scheme under arrangements to be “carried interest” for the purposes of this group of sections and that Schedule;

(b)

Part 2 sets out certain circumstances in which a sum arising to another person is treated as arising to the individual;

(c)

Part 3 sets out how to determine the extent to which carried interest arising to an individual from an investment scheme is qualifying carried interest;

(d)

Part 4 allows for an election to be made to treat carried interest as arising at an earlier time.

(5)

A sum of carried interest arising to an individual from an investment scheme in a tax year is to be treated for the purposes of this section as not being a sum of carried interest to the extent that—

(a)

it is chargeable to income tax on the individual by virtue of section 62 (earnings) or Part 7 of ITEPA 2003 (employment income relating to securities) in the tax year, or

(b)

an election made under section 23J that has effect for the tax year applies in relation to the sum.

23JElection to disapply section 23I

(1)

An individual who performs investment management services directly or indirectly in respect of an investment scheme under arrangements mentioned in section 23I(1)(a) may make an election under this section.

(2)

Where an election made under this section has effect for a tax year, the election applies in relation to a sum of carried interest arising to the individual under the arrangements in the tax year to the extent that the carried interest would, ignoring this group of sections, be brought into account in calculating the profits of a trade of the individual for the purposes of income tax for any tax year.

(3)

An election made under this section—

(a)

must be made by notice given to an officer of Revenue and Customs, and

(b)

may not be revoked.

(4)

A notice making an election—

(a)

must state the tax year for which it is to have effect, and

(b)

may not be given after 31 January following the end of that tax year.

23KLocation of trade treated as carried on under section 23I etc

(1)

An individual who is treated as carrying on a trade for a tax year under section 23I is treated as carrying on the trade—

(a)

wholly in the United Kingdom, if all of the applicable workdays are UK workdays;

(b)

wholly outside the United Kingdom, if all of the applicable workdays are not UK workdays;

(c)

otherwise, partly in the United Kingdom and partly outside the United Kingdom.

(2)

Where the trade is treated as carried on partly in the United Kingdom and partly outside the United Kingdom, the amount to be treated as the profits arising from the part of the trade treated as carried on in the United Kingdom is the sum of the non-qualifying profits of that part of the trade and 72.5% of the qualifying profits of that part of the trade.

(3)

In subsection (2)—

(a)

the amount of the non-qualifying profits of the part of the trade treated as carried on in the United Kingdom is the proportion of the non-qualifying profits of the trade (determined in accordance with section 23I(3)(a)) that is the same as the proportion of the applicable workdays that are UK workdays (but see subsection (4));

(b)

the amount of the qualifying profits of the part of the trade treated as carried on in the United Kingdom is the proportion of the qualifying profits of the trade (determined in accordance with section 23I(3)(b)) that is the same as the proportion of the applicable workdays that are UK workdays (but see subsection (5)).

(4)

For the purposes of subsection (3)(a) in a case where—

(a)

the individual is a non-UK resident for the tax year, and

(b)

any of the non-qualifying profits of the trade are anticipated qualifying profits,

any UK workday in a non-UK tax year is not to be treated as a UK workday (but remains an applicable workday) for the purposes of determining the proportion of the anticipated qualifying profits that is an amount of non-qualifying profits of the part of the trade treated as carried on in the United Kingdom.

(5)

For the purposes of subsection (3)(b) in a case where the individual is a non-UK resident for the tax year, the following days are not to be treated as UK workdays (but remain applicable workdays)—

(a)

any UK workday prior to 30 October 2024;

(b)

any UK workday in a non-UK tax year;

(c)

any UK workday prior to a period of 3 or more non-UK tax years.

(6)

For the purposes of this section—

(a)

a day is an “applicable workday” if it is a day in the relevant period on which the individual performs any investment management services directly or indirectly in respect of an investment scheme (whether or not under the arrangements mentioned in section 23I(1)(a));

(b)

a day is a “UK workday” if it is a day in the relevant period on which the individual spends more than 3 hours performing any investment management services directly or indirectly in respect of an investment scheme (whether or not under those arrangements) in the United Kingdom;

(c)

a year is a “non-UK tax year” if the individual is a non-UK resident for the tax year and there are fewer than 60 UK workdays in the year;

(d)

non-qualifying profits are “anticipated qualifying profits” if, on the first UK workday in the relevant period, it was reasonable to assume that they would be qualifying profits.

(7)

For the purposes of subsection (6) the “relevant period” is the period—

(a)

beginning with the later of—

(i)

the day on which the first external investor was admitted to any scheme from which the individual is entitled to carried interest under the arrangements mentioned in section 23I(1)(a), and

(ii)

the first day on which the individual performs any investment management services directly or indirectly in respect of an investment scheme under the arrangements;

(b)

ending with the earlier of—

(i)

the last day in the tax year for which the individual was treated as carrying on the trade under section 23I on which a sum of carried interest arose to the individual from an investment scheme under the arrangements for the purposes of that section, and

(ii)

the last day on which the individual performed any investment management services directly or indirectly in respect of an investment scheme under the arrangements.

(8)

For the purposes of subsection (6)—

(a)

investment management services performed by an individual in the course of travelling to or from the United Kingdom by air or sea or via a tunnel under the sea are assumed to be performed overseas even during the part of the journey in or over the United Kingdom, and

(b)

travelling to or from the United Kingdom is taken to—

(i)

begin when the individual boards the aircraft, ship or train that is bound for a destination in the United Kingdom or (as the case may be) overseas, and

(ii)

end when the individual disembarks from that aircraft, ship or train.

23LCarried interest arising where individual deceased

(1)

This section applies where—

(a)

the individual referred to in section 23I(1)(a)has died, and

(b)

as a result, one or more sums that would have been sums of carried interest arising to the individual from an investment scheme under the arrangements arise instead to another person in a tax year.

(2)

For the purposes of sections 23I and 23K—

(a)

the sums are treated as if they had arisen to the individual in the tax year in which they arose to the other person,

(b)

the other person is treated as carrying on the trade under section 23I for that tax year (instead of the individual), and

(c)

the other person is treated as the person receiving or entitled to the profits of that trade.

23MTemporary non-UK residents: tax treatment of accrued carried interest gains

(1)

This section applies where, on the disposal of an asset by an individual who was temporarily non-resident in tax year 2025-26 or earlier, a gain accrued to the individual in the temporary period of non-residence under section 103KA(2) or (3) of TCGA 1992 (as it then had effect).

(2)

For income tax purposes—

(a)

the individual is treated as carrying on a trade for the period of return,

(b)

the amount to be treated as the profits of the trade for the period of return is 72.5% of the amount of the gain which accrued to the individual in the temporary period of non-residence, and

(c)

the individual is treated as the person receiving or entitled to those profits.

(3)

For the purposes of this section, “the period of return”, “temporarily non-resident” and “the temporary period of non-residence” have the meanings given by Part 4 of Schedule 45 to FA 2013 (statutory residence test: anti-avoidance).

23NPermitted deduction etc

(1)

For the purpose of section 23I the amount of any “permitted deduction” for a tax year is—

(a)

the amount of any consideration given by or on behalf of the individual wholly and exclusively for the entitlement to carried interest under the arrangements referred to in section 23I(1)(a), minus

(b)

the amount of any such consideration deducted in calculating the profits of a trade that the individual is treated as carrying on under section 23I for an earlier tax year by virtue of those arrangements.

(2)

In subsection (1), “consideration” means consideration in money or money’s worth but does not include the performance of any investment management services directly or indirectly in respect of an investment scheme.

(3)

For the purposes of this Act no other deduction may be made from the amount treated as the profits of the trade under section 23I.

23PCarried interest: anti-avoidance

(1)

In determining whether section 23I applies in relation to an individual, no regard is to be had to any arrangements the main purpose, or one of the main purposes, of which is to secure that that section does not to any extent apply in relation to—

(a)

the individual, or

(b)

the individual and one or more other individuals.

(2)

In determining whether an individual falls within paragraph (a) of section 23I(1), no regard is to be had to any arrangements the main purpose, or one of the main purposes, of which is to secure that the individual falls within that paragraph.

23QCarried interest: avoidance of double taxation

(1)

Subsection (2) applies where—

(a)

an individual performs investment management services directly or indirectly in respect of an investment scheme under arrangements mentioned in section 23I(1)(a), and

(b)

the individual is entitled to carried interest under the arrangements.

(2)

No income tax is chargeable on the individual by virtue of the individual’s entitlement to carried interest other than—

(a)

income tax chargeable in respect of carried interest arising to the individual under the arrangements—

(i)

by virtue of section 23I or 23M,

(ii)

by virtue of section 62 (earnings) or Part 7 of ITEPA 2003 (employment income relating to securities), or

(iii)

where an election made under section 23J has effect for a tax year, otherwise under this Part, or

(b)

income tax chargeable in respect of—

(i)

the award of the entitlement to carried interest to the individual, or

(ii)

the individual’s acquisition of the entitlement to carried interest,

whether by virtue of section 62 (earnings) or Part 7 of ITEPA 2003 (employment income relating to securities) or otherwise.

(3)

Subsection (4) applies where—

(a)

an individual is chargeable to income tax and national insurance contributions by virtue of section 23I or 23M in respect of a sum of carried interest arising to the individual from an investment scheme, and

(b)

at any time any other UK tax or national insurance contributions charged on any person—

(i)

in relation to the sum mentioned in paragraph (a), or

(ii)

or in respect of any person’s entitlement to that sum,

has or have been paid and not repaid.

(4)

The individual may make a claim for one or more consequential adjustments to be made in respect of the profits chargeable by virtue of section 23I or 23M to take account of the amounts paid as mentioned in subsection (3)(b).

(5)

On a claim under this section an officer of Revenue and Customs must make such of the consequential adjustments claimed (if any) as are just and reasonable.

(6)

Consequential adjustments in respect of the profits chargeable by virtue of section 23I or 23M must not have the effect that—

(a)

the total of—

(i)

the amount of income tax and national insurance contributions charged on the adjusted profits by virtue of section 23I or 23M, and

(ii)

any amounts paid as mentioned in subsection (3)(b), is less than

(b)

the amount of income tax and national insurance contributions to which the individual was chargeable by virtue of section 23I or 23M in respect of the sum of carried interest before the making of any consequential adjustments.

(7)

Consequential adjustments may be made—

(a)

in respect of any period,

(b)

by way of an assessment, the modification of an assessment, the amendment of a claim, or otherwise, and

(c)

despite any time limit imposed by or under an enactment.

(8)

In this section “UK tax” means income tax, corporation tax, capital gains tax or inheritance tax.

(9)

For the purposes of section 9(2) of TIOPA 2010 (unilateral entitlement to credit for non-UK tax corresponding to capital gains tax), in a case where the capital gain mentioned in subsection (2)(b) of that section accrued on a sum of carried interest arising to an individual, the reference to capital gains tax calculated by reference to that gain is to be read as if it were a reference to income tax chargeable under section 23I in respect of the sum of carried interest.

23RDefinitions

(1)

In this section, this group of sections and Schedule A1—

“AIF” has the meaning given by regulation 3 of the Alternative Investment Fund Managers Regulations 2013 and includes—

(a)

arrangements which permit an external investor to participate in investments acquired by the AIF without participating in the AIF itself, and

(b)

arrangements under which sums arise to an individual performing investment management services in respect of the AIF without those sums arising from the AIF itself;

“arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable);

“collective investment scheme” has the meaning given by section 235 of FISMA 2000 and includes—

(a)

arrangements which permit an external investor to participate in investments acquired by the collective investment scheme without participating in the scheme itself, and

(b)

arrangements under which sums arise to an individual performing investment management services in respect of the collective investment scheme without those sums arising from the scheme itself;

“external investor”, in relation to an investment scheme and any arrangements, means a participant in the scheme other than—

(a)

an individual who at any time performs or is to perform investment management services directly or indirectly in respect of the scheme, or

(b)

a person through whom sums are to, or may, arise directly or indirectly to such an individual from the scheme under the arrangements;

“investment management services”, in relation to an investment scheme, includes—

(a)

the provision of investment advice,

(b)

seeking funds for the purposes of the scheme from participants or potential participants,

(c)

researching potential investments to be made for the purposes of the scheme,

(d)

acquiring, managing or disposing of property for the purposes of the scheme,

(e)

acting for the purposes of the scheme with a view to assisting a body in which the scheme has made an investment to raise funds, and

(f)

any activity incidental or ancillary to any activity mentioned in paragraphs (a) to (e);

“investment scheme” means—

(a)

a collective investment scheme, or

(b)

an AIF, or any part of an AIF, that is not a collective investment scheme;

“participant”, in relation to an investment scheme, means a person taking part in the scheme, whether by becoming the owner of, or of any part of, the property that is the subject of the scheme or otherwise;

“sum” includes any money or money’s worth (and other expressions are to be construed accordingly);

“this group of sections” means sections 23I to 23Q.

(2)

For the purposes of section 23K and Schedule A1, in determining what it is reasonable to assume in relation to an investment scheme, regard is to be had to all the circumstances including in particular any prospectus or other document which—

(a)

is made available to external investors in the investment scheme, and

(b)

on which external investors may reasonably be supposed to have relied or been able to rely.”