Draft legislation on UK carried interest tax reform gets expert comment from Osborne Clarke

Osborne Clarke has responded to the government’s technical consultation around the draft legislation, published on 21 July 2025, which will bring into effect the new rules on carried interest from April 2026.  

The submission builds on Osborne Clarke's response to the government's previous consultation on reform of the rules and it focuses in particular on the new “average holding period” (AHP) condition, the territorial scope for non-residents, and the approach to double taxation relief.

The new regime

The revised tax regime, which will apply to carried interest receipts arising on or after 6 April 2026, will tax any carried interest returns (regardless of the underlying character of the return) as "deemed trading income". Consequently, carried interest returns will be taxed at combined income tax and National Insurance contributions (NICs) rates of up to 47%.

Where the carried interest is "qualifying" (that is, where it meets the AHP condition), a discount multiplier mechanism will apply. This means that returns will be taxed instead at an effective tax rate for additional rate taxpayers of around 34.1% (including NICs).

General comments

Osborne Clarke welcomed the decision, following the responses received as part of the previous consultation, that determining whether the carried interest is qualifying will broadly depend on the AHP, without the inclusion of additional qualifying conditions. Osborne Clarke's response highlighted, however, that the burden of complying with, and monitoring, the AHP condition (together with other areas of compliance under the new regime) will still be significant across the fund management industry and this should not be underestimated.

Osborne Clarke also supported the general structure of the draft legislation covering the AHP condition, as it broadly replicates the current Income Based Carried Interest (IBCI) rules, with which advisers and fund managers are familiar and to which the fund management industry as a whole has prior exposure. Osborne Clarke recognised the attempts of the government to improve the AHP condition rules as part of this process by addressing certain historic areas of difficulty with the IBCI rules (in particular the replacement of the scheme director condition with a wider test of "relevant rights").

Guidance required

Osborne Clarke's response commended attempts to limit the complexity of the regime in respect of the qualifying conditions, but highlighted the need for the prompt publication of detailed guidance (in particular, in relation to the new AHP condition), ideally in advance of the new regime taking effect. This guidance would be expected to assist the fund management industry in understanding the new rules and to offer essential practical guidance for fund managers and carried interest holders in terms of navigating the new treatment of carried interest.

Specific questions

Osborne Clarke's response also raised a number of specific questions and comments around the draft legislation and how it will operate in certain situations. These questions and comments covered topics such as the AHP condition, the territorial scope of the new regime and the potential impact on non-UK resident carried interest holders as well as requesting clarification on some aspects relating to double tax relief.

Osborne Clarke comment

It is encouraging that the government has recognised some of the concerns of stakeholders in the draft legislation and continues to engage with the industry in relation to the new rules. We hope to continue discussions with HMRC in this regard, both generally and on some of the more technical points.

If you would like to discuss the draft legislation and our response in more detail, please speak to one of the contacts below.