What the 2026 carried interest reform means for mobile fund managers

The reclassification, and why it lands hard

On 6 April 2026 the United Kingdom stopped taxing carried interest according to the nature of the underlying return. From that date carried interest is taxed as the profit of a deemed trade, brought within income tax and Class 4 National Insurance, regardless of whether the fund's gain was a capital gain, a dividend or interest. The reform was announced at the Autumn Budget 2024, refined through the government response of June 2025, and set out in draft legislation published by HMRC in July 2025. It takes effect for carried interest arising on or after 6 April 2026.

There is no grandfathering. Carry awarded years ago, on funds raised long before the reform, is taxed under the new rules if the sum arises on or after the commencement date. The date that matters is the date the carried interest arises, not the date the arrangement was struck. The 2025/26 tax year was a transition, during which the capital gains rate on carried interest rose from 28% to 32%. That transition has now closed, and the capital gains route has closed with it.

For a fund manager, this is not a rate tweak. It is a change in the character of the income, and character drives everything that follows: the rate, the National Insurance charge, and the territorial reach of the charge.

The rate: qualifying carry and income-based carried interest

The reform did not abolish the distinction between good carry and bad carry. It preserved a concession for qualifying carried interest and left everything else exposed to the full income tax charge.

Qualifying carried interest is charged after a 72.5% multiplier. Only 72.5% of the sum is brought into the income tax computation. At the 45% additional rate, with 2% Class 4 National Insurance on the same base, the effective rate is 34.075%. That is the number to hold in mind: qualifying carry moves from a 32% capital gains charge to an effective 34.075% income charge, a modest increase.

Carry that does not qualify is income-based carried interest, and it is taxed in full. At the additional rate with Class 4 National Insurance that is close to 47%, with no multiplier relief. The gap between 34.075% and 47% is the whole game, and it is decided by whether the carry qualifies.

Whether carry qualifies turns on the long-standing average holding period rules, which look at how long, on a weighted average, the fund holds its investments. Carry on investments held on average for at least 40 months is broadly fully qualifying; carry on investments held for less than 36 months is broadly income-based; the range between the two is tapered. The government confirmed in June 2025 that the further conditions it had floated, a minimum co-investment and a minimum period between the award and the receipt of carry, would not be introduced. The qualifying test is therefore the holding period, not a new set of hurdles.

The charge follows the work, not the form of the return

The most consequential part of the reform is territorial, and it is the part most easily missed by managers who read only the headline rate.

Because carried interest is now the profit of a deemed trade of performing investment management services, the UK's right to tax it is framed around where those services are performed. A manager who is UK resident is taxable on their carried interest in the ordinary way. A manager who is not UK resident is taxable in the UK on deemed carried interest income by reference to their UK workdays, where those workdays in a UK tax year exceed a 60-day threshold. The charge attaches to the days worked in the United Kingdom, not to the manager's nationality or to where the fund is domiciled.

This is the point that reshapes relocation planning. Under the old capital gains treatment, a manager who became non-UK resident could, in the right circumstances, take carry outside the UK charge. Under the new rules, physical presence and work in the United Kingdom keep a proportion of the carry within the UK charge even after the manager has left, once the 60-day threshold is passed. Departure is no longer a clean break. It is the start of a workday count.

Whether a manager is UK resident at all is decided before any of this, by the UK Statutory Residence Test, which counts days and connecting factors and does not care how the income is labelled. A manager who intends to rely on non-residence has to win the residence question first, and then still account for UK workdays above the threshold.

The treaty overlay and the UAE corridor

There is a second layer, and for the UK-UAE corridor it is the decisive one.

The deemed UK trade is a creature of UK domestic law, and it is not intended to override the United Kingdom's tax treaties. Where a manager is resident in a treaty jurisdiction, the business profits article of the relevant treaty restricts the UK's right to tax trading profits to those attributable to a UK permanent establishment. HMRC's stated view is that, for a treaty-resident manager, the deemed trade rules bite only where that manager has a UK permanent establishment. Without a UK permanent establishment, the treaty caps the domestic charge.

The United Arab Emirates is a treaty jurisdiction. The 2016 UK-UAE Double Taxation Convention entered into force on 25 December 2016 and took effect from 1 January 2017, given effect in UK law by the Double Taxation Relief (United Arab Emirates) Order 2016. It follows the model structure, so business profits are taxable in the UK only through a UK permanent establishment. A manager who is genuinely resident in the UAE for treaty purposes, and who has no UK permanent establishment, is in a materially different position from a manager who has simply spent fewer than 183 days in the UK.

The corridor analysis therefore runs on three questions, in order. First, is the manager UK resident under the Statutory Residence Test. Second, if not, is the manager treaty-resident in the UAE under the Convention's own residence definition, which is not the same as the UK test and has its own criteria. Third, does the manager's UK activity, an office, a desk, a habitual place of work, amount to a UK permanent establishment. The rate is settled by the first section of this note. The exposure is settled here.

What relocation does and does not switch off

The honest position is that moving to Dubai changes the shape of the UK charge on carried interest. It does not, by itself, remove it.

• Carry referable to UK services performed before departure remains in charge. The reform taxes the reward for investment management services, and services performed while UK resident are UK services. A manager cannot retrospectively decharge past work by later becoming non-resident.
• UK workdays after departure count. Continuing to manage the fund from London for more than 60 workdays in a UK tax year brings a proportion of the carry back into the UK charge, subject to the treaty and permanent establishment analysis above.
• Temporary non-residence has its own trap. A manager who leaves and returns within the statutory period can be caught by the temporary non-residence rules, which pull certain amounts arising during the period of absence back into charge on return.
• The structure of the manager's engagement matters. The classification interacts with how the manager holds their interest, and for members of a management LLP the analysis sits alongside the salaried member rules confirmed in BlueCrest.

Relocation remains a legitimate and often decisive planning step, but it has to be built on the residence position, the treaty position and the permanent establishment position together, and documented before the carry arises rather than explained afterwards.

Carried interest is no longer taxed by what it is. It is taxed by where the work was done, and for the internationally mobile manager that is a question of days, treaty residence and permanent establishment, not of labels.

Frequently asked questions

How is carried interest taxed in the UK from April 2026?

From 6 April 2026 carried interest is taxed as the profit of a deemed trade, within income tax and Class 4 National Insurance, rather than as a capital gain. This applies to carried interest arising on or after that date whenever it was awarded, because there is no grandfathering for pre-reform arrangements.

What is the effective tax rate on carried interest after the 2026 reform?

Qualifying carried interest is charged after a 72.5% multiplier, giving an effective rate of 34.075% at the 45% additional rate with 2% Class 4 National Insurance. Carried interest that does not qualify, known as income-based carried interest, is taxed in full at close to 47% with no multiplier relief.

What is the difference between qualifying and income-based carried interest?

Qualifying carried interest receives the 72.5% multiplier and the lower effective rate; income-based carried interest does not and is taxed in full. Whether carry qualifies turns on the average holding period rules: broadly, carry on investments held on average for at least 40 months is fully qualifying, carry on investments held for under 36 months is income-based, and the range between is tapered.

Does the reform apply to carried interest awarded before April 2026?

Yes. There is no grandfathering. Carried interest that arises on or after 6 April 2026 is taxed under the new income tax rules even if the underlying fund and the carry arrangement predate the reform. The date the carry arises is the date that determines the treatment, not the date it was awarded.

How are non-UK-resident fund managers taxed on carried interest?

A non-UK-resident manager is taxable in the UK on deemed carried interest income by reference to UK workdays in a tax year that exceed a 60-day threshold. Because the charge follows where the investment management services are performed, working in the UK above that threshold keeps a proportion of the carry within the UK charge even after the manager has become non-resident.

Does moving to Dubai remove UK tax on carried interest?

No, not by itself. Carry referable to UK services performed before departure stays in charge, and UK workdays after departure above the 60-day threshold can bring further amounts into charge. Relocation reshapes the UK position around residence, treaty status and permanent establishment, and it has to be planned before the carry arises rather than assumed.

Does the UK-UAE tax treaty protect carried interest from UK tax?

The deemed UK trade is not intended to override the UK's treaties. For a manager who is treaty-resident in the UAE under the 2016 UK-UAE Double Taxation Convention, HMRC's stated view is that the charge applies only where the manager has a UK permanent establishment, so the business profits article can restrict the UK charge. The protection depends on genuine UAE treaty residence and the absence of a UK permanent establishment, both of which are questions of fact.

Are Class 4 National Insurance contributions due on carried interest?

Yes. Because carried interest is treated as the profit of a deemed trade from 6 April 2026, it is within Class 4 National Insurance as well as income tax. The 2% Class 4 rate on the relevant base is what takes the effective rate on qualifying carry to 34.075% rather than 45%.

Critical advisory. The jurisdictional frameworks set out above carry strict liability and retroactive tax exposure. Executing these structures through standard formation agents, without institutional-grade tax architecture, is a primary trigger for HMRC and Federal Tax Authority audits. To mitigate systemic risk and discuss bespoke structuring, initiate a confidential briefing with our Managing Partners.