Territorial Aspects Of The New Carried Interest Regime

From 6 April 2026, the UK's carried interest regime will be reformed so that carried interest is taxed within the income tax and National Insurance Contributions (NICs) regime as receipts of a deemed trade carried on by the relevant executive. Qualifying carried interest receipts will be subject to a 72.5% multiplier, giving additional rate taxpayers an effective 34.1% combined income tax and NICs rate. “Qualifying” carry will be amounts that satisfy a 40‑month average holding period (AHP) test - a refined version of the existing Income-based Carried Interest (IBCI) rules.

One consequence of deeming carried interest to be trading income is that non‑UK resident executives may be taxable in the UK on carried interest to the extent it is attributable to UK‑performed duties, subject to applicable double tax treaties (DTTs). The Government has proposed territorial rules intended to keep the UK attractive to internationally mobile executives while protecting the UK tax base for carry with a strong UK nexus. Statutory limits on the UK's taxing rights for non‑residents will include:

• Pre‑30 October 2024 duties: any UK duties performed prior to 30 October 2024 (Autumn Budget Day 2024) will be treated as if they were non-UK services. This means that the extra territorial tail will not apply by reference to UK duties performed by an executive before 30 October 2024;

• <60 UK workdays: any UK duties performed in a tax year for which an individual is not UK resident will be treated as if they were non-UK services, provided the executive spends fewer than 60 workdays in the UK during the relevant tax year. This means that limited business travel to the UK by non-residents after 30 October 2024 will not trigger the tail; and

• Three‑year tail: any UK duties performed in any tax year will also be treated as if they were non-UK services if three full tax years (in addition to the current tax year) have passed during which time the individual was neither UK tax resident nor met the 60 UK workday threshold. This means that the tail will only last three years for an individual leaving the UK provided they limit their workdays in the UK post non-residence to below the 60 workday threshold.

The deemed trade will be treated as carried on in the UK to the extent relevant investment management services were performed in the UK, which will be determined using a new fixed apportionment rule that compares an individual's UK and non-UK workdays during the period between when they are awarded carried interest and when it is realised.

This has two principal effects:

• first, non-UK residents will be subject to income tax on carried interest proceeds to the extent it relates to relevant investment management services that were performed in the UK, subject to any applicable DTT and the new statutory guardrails referred to above; and

• second, UK residents who qualify for the proposed FIG regime in a tax year should be exempt on carried interest arising in that year to the extent it relates to services performed outside the UK. The FIG regime will be available for the first four years of UK tax residence.

The question of which DTT article should apply is not clear-cut. The Government's view is that, because domestic law deems carry to be trading income, the business profits article should apply. On that basis, the UK's taxing rights over non‑resident executives would depend on whether UK‑performed duties give rise to a UK permanent establishment (PE) for the executive. The factual threshold for a PE in this context is unclear although clearly the greater the presence of the executive in the UK and the more concentrated that presence is on a particular location, the more likely it is that a permanent establishment will be created.

The extent to which an applicable DTT will preserve the UK's taxing rights in respect of a non-resident is an untested point in this context and it is a point on which others may take a different view. Further, whatever the correct approach from a UK domestic perspective may be, it is possible that in practice the other country that is party to the relevant DTT may take a different view.

This article appears in UK Tax Snapshot – October 2025'

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