Carried Interest for Offshore Fund Managers: The 2026 Tax Changes

The Current Treatment of Carried Interest

Carried interest — the performance allocation paid to fund managers, typically 20% of profits above a hurdle rate — has historically been taxed in the UK as a capital gain rather than income. The capital gains treatment reflected the economic reality that carried interest represents a share of the fund's profits on asset disposals, and the theoretical underpinning that fund managers bear entrepreneurial risk alongside investors.

Under the pre-2026 regime, UK-resident carried interest recipients pay CGT at 28% on carried interest gains, with no availability of the lower 18% or 24% standard CGT rates (a specific rule in Section 103KA TCGA 1992 fixes the rate at 28% for all carried interest regardless of the recipient's income band). This compares with income tax rates that can reach 45% plus 2% employee NIC on earned income.

The 28% rate was itself a consequence of the 2015 changes that ended the treatment of carried interest as a business asset eligible for the 10% Entrepreneurs' Relief rate, following public and media criticism that senior private equity professionals were paying lower effective rates than their employees.

The April 2026 Change

The Autumn Budget 2024 announced that carried interest will be recharacterised as employment income from 6 April 2026, taxed at income tax rates rather than CGT rates. The effective rate will be calculated as follows:

• Carried interest will be treated as employment income for income tax purposes
• The first £100,000 of carried interest in any tax year will be exempt
• Above £100,000, carried interest will be taxed at the individual's marginal income tax rate
• NIC at the employer and employee rate will not apply (carried interest is specifically excluded from NIC under the employment income treatment)
• A "base cost shift" mechanism will apply to prevent double taxation where carried interest has already borne UK CGT on disposal of underlying assets

The effective rate on carried interest above £100,000 for a higher-rate taxpayer will be approximately 45% (marginal income tax on additional income). For income between the higher-rate threshold and the additional rate threshold, the rate will be 40%. Compared to the current 28%, this represents a significant increase.

Estimated Impact by Income Level

Carried Interest Amount	Current Rate	Post-April 2026 Rate	Additional Tax
£500,000	28% = £140,000	~45% net = £180,000	~£40,000
£1,000,000	28% = £280,000	~45% = £405,000	~£125,000
£5,000,000	28% = £1,400,000	~45% = £2,025,000	~£625,000
£10,000,000	28% = £2,800,000	~45% = £4,050,000	~£1,250,000

Which Structures Are Affected

Direct Carried Interest

A GP/manager who receives carried interest directly from the fund — as a share of fund profits distributed to the carried interest vehicle (CIV) — is directly affected where that GP/manager is UK resident.

Carried Interest Vehicles (CIVs)

UK private equity funds typically pay carried interest through a CIV — a limited partnership or similar vehicle — that then distributes to the carried interest recipients. The 2026 change applies to the receipt at the individual level, not the CIV level. A CIV that holds accumulated carried interest does not shelter the income tax charge — the charge arises when the individual receives the distribution.

Co-Investment Returns

Returns from direct co-investment by fund managers alongside fund investors — using the manager's own capital — are not carried interest. They are investment returns on the manager's own money, subject to the standard CGT treatment applicable to the underlying asset class (shares, real estate, etc.). The 2026 change does not affect genuine co-investment returns.

Phantom Carry

Phantom carry arrangements — where the manager receives a cash bonus calculated by reference to fund performance but without any actual interest in fund assets — are employment income at present and remain employment income after 2026. The 2026 change narrows (but does not eliminate) the distinction between phantom carry and real carry.

Offshore Planning Limitations

The obvious planning question is whether UK-resident fund managers can use offshore management companies to receive carried interest in a lower-tax jurisdiction. The answer is heavily constrained by existing UK legislation.

Transfer of Assets Abroad (Sections 714-751 ITA 2007): If a UK individual transfers the right to carried interest to an offshore person, the income arising to that offshore person is attributed back to the UK individual if the transfer was motivated by tax avoidance. The breadth of sections 720 and 727 ITA 2007 makes it very difficult to use an offshore vehicle to shelter carried interest from a UK-connected fund.

Employment Income Sourcing: If the services that generate the carried interest are performed in the UK, the income has a UK source and is UK employment income regardless of where the payment is made.

Departure and Relocation: The only robust planning option for fund managers wishing to avoid the 2026 change is genuine relocation — establishing residence in a lower-tax jurisdiction and performing the management activities from that jurisdiction. Dubai, Switzerland, Singapore, and Ireland are all jurisdictions with lower (or no) personal tax on carried interest and sufficiently developed fund management infrastructure to support genuine operations.

Economic Substance Requirement for Offshore Management

A UK-connected fund managed from an offshore management company is viable from a UK tax perspective only if:

• The offshore manager genuinely employs the investment professionals
• Investment decisions are genuinely made offshore
• The fund is not treated as UK-managed and therefore UK-resident under the central management and control test
• The UK CFC rules do not attribute the management profits to the UK-resident shareholders

An offshore management company staffed by professionals who continue to live in London and "dial in" to offshore board meetings fails this test on every count.

HPT Group advises fund managers and GPs on carried interest structuring, the 2026 income tax changes, and the feasibility of genuine offshore relocation for those considering that option. For a personalised analysis of your carried interest position and available planning options in light of the 2026 changes, contact our fund tax advisory team or apply for a consultation.