Both countries tax it, under different labels and often in different years. From 6 April 2026 the UK treats carried interest as the profits of a trade, charged to income tax and Class 4 National Insurance, with a reduced charge on the part that qualifies. The US usually keeps the character of the fund's own gains, so carry is capital gain on the US return, long-term only where the three-year rule in section 1061 is met. The foreign tax credit has to bridge the two, and it does not always do so.
This post is for US citizens and green card holders who work in investment management in the UK and hold carried interest in a private equity, venture, credit or real estate fund. It goes deeper than the carried interest section of our guide to US-UK tax for founders, fund managers and executives. It covers the new UK charge, its reach to work done abroad, the US rules, and the credit and timing problems between them.
What changed for carried interest in the UK in April 2026
The UK moved carried interest out of capital gains tax and into income tax. HMRC's policy paper on the revised regime (opens the official HMRC page in a new tab) says it sits wholly within the income tax framework and applies on and after 6 April 2026. The individual is treated as carrying on a trade, and the carry is its profit.
Before that date most carried interest was charged under capital gains tax (opens the official GOV.UK page in a new tab), at carry rates set apart from the ordinary rates. GOV.UK now says that carried interest received from 6 April 2026 bears income tax and National Insurance instead. The change is in section 58 of, and Schedule 11 to, the Finance Act 2026, which insert new rules into the Income Tax (Trading and Other Income) Act 2005 and remove the old capital gains provisions on carry.
The deemed trade is narrow. It applies where an individual performs investment management services for an investment scheme and carried interest arises under those arrangements. Carry that is already taxed as employment income is excluded, and the legislation states that it applies to services whenever performed, so carry earned on work done before April 2026 can fall within the new charge if it arises afterwards.
How much of the carried interest does the UK charge
That depends on whether the carry is qualifying. Non-qualifying carry is charged in full as trading profit. For qualifying carry, only a fixed proportion of the profit, after permitted deductions, is brought into charge. Both parts bear Class 4 National Insurance as well as income tax, according to HMRC's policy paper.
Whether carry qualifies turns on the average holding period of the fund's investments, weighted by value and measured when the carry arises. Below a lower threshold none of it qualifies, above a higher threshold all of it does, and a sliding scale applies between. Special rules cover venture capital, controlling stakes, real estate, credit funds and funds of funds. A separate claim can treat carry that arises within a set period after the fund starts to invest as fully qualifying, subject to conditions and to rules that apply if the test is not later met.
The only deductions are amounts given wholly and exclusively for the right to the carry. There is also an election, made by notice to HMRC and irrevocable, to treat carried interest as arising earlier than it otherwise would. That election can change which UK tax year bears the charge, which matters for the US credit discussed below, so it is worth considering before a fund's first exit.
- Whether the carry arises under arrangements for investment management services
- Whether any part is already taxed as employment income
- The fund's average holding period when each amount arises
- Any special rules for the fund's strategy, such as credit or real estate
- Whether an early-arising election or a conditional claim has been made
Does the UK tax carry earned for work done abroad
For a UK resident, generally yes. For someone not UK resident, the UK charge follows UK workdays. The deemed trade is treated as carried on in the UK in proportion to the days on which investment management services were performed here for more than a set number of hours, and only that share is charged.
Some UK workdays are disregarded for a non-resident: those before 30 October 2024, those in a year of non-residence with only a small number of UK workdays, and those before a run of several such years. Travel to and from the UK counts as time overseas. This is how the regime can reach a US manager who has left London, or one based in New York who flies in for portfolio meetings.
Recent arrivals face a further question. The remittance basis was abolished from 6 April 2025 and replaced by the foreign income and gains regime (opens the official GOV.UK page in a new tab), which gives relief on foreign income and gains for four tax years to people arriving after a long period of non-residence. How it applies to the part of a deemed trade linked to non-UK workdays should be checked on the facts, and residence itself is decided by the Statutory Residence Test. Our UK Self Assessment service prepares the SA100 return on which the charge is reported.
- UK resident throughout: carry generally charged in full under the deemed trade
- Non-resident: charged on the share linked to counted UK workdays
- Leaving the UK: earlier UK workdays can still be counted unless disregarded
- Arriving in the UK: check the foreign income and gains regime and residence
How does the US tax the same carried interest
As a share of the fund's income, keeping the character of what the fund earned. A US person holding carry in a fund partnership reports the allocated share each year, and the partner's instructions for Schedule K-1 (opens the official IRS page in a new tab) say a partner may be liable for tax on that share whether or not it is distributed.
Where the fund sells investments at a gain, the carry holder's share is usually capital gain. Section 1061 (opens the official IRS page in a new tab) then applies to an applicable partnership interest, which is an interest held in connection with substantial services in a business of raising capital and investing it. Gain allocated to such an interest is treated as long-term only where the asset was held for more than three years. Gain that fails the test is recharacterised as short-term and taxed at ordinary rates.
The fund attaches a worksheet to the K-1 showing the gains tested under the rule. The holder combines the figures from every fund on a second worksheet and reports a section 1061 adjustment on Schedule D and Form 8949, moving gain from long-term to short-term. The US test looks at each asset, while the UK test looks at the fund's average, so the same disposal can pass one and fail the other. We prepare these returns through our individual tax return preparation service, with the fund papers alongside Form 1040.
Why the foreign tax credit may not match the UK charge
Because the credit is measured under US rules, not UK ones. The UK label of trading profit does not change the US character of the gain. UK income tax on the carry is credited against US tax on the same income only so far as the US limitation, worked out by category and by source, allows it.
Publication 514 (opens the official IRS page in a new tab) puts gains on investment property in the passive category, unless the foreign tax on them exceeds the highest US tax that could be imposed, in which case the income is high-taxed and moves to the general category. Long-term gains are also scaled down on Form 1116 to reflect the lower US rates, which shrinks the limitation. Gain recharacterised as short-term under section 1061 is not scaled down. Each of these steps changes how much UK tax can be credited.
Source is the harder question. Publication 514 says gain on personal property is generally sourced by the seller's residence, and that a US citizen with a tax home abroad is treated as a non-resident only where foreign tax at a minimum level is paid on the gain. Where the gain is US-source, Article 24 of the US-UK treaty (opens the official IRS page in a new tab) may deem it to arise in the UK for a citizen resident there, to the extent needed to avoid double taxation. Whether that applies to a receipt the UK calls trading profit depends on the facts and the fund structure, which our treaty relief service reviews before filing.
How are timing gaps between the two charges handled
Through the choice of credit year, carryovers and, on the UK side, the early-arising election. The US taxes carry when the fund allocates gain, often before cash moves. The UK charges it when the carry arises to the individual, which can be later, and the UK tax year ends on 5 April.
Take a US citizen who is a principal at a London buyout manager, UK resident for several years, holding carry through a Delaware fund partnership. The fund sells a portfolio company late in one calendar year and allocates gain on her K-1 for that year. The carry is paid out the following spring, in a later UK tax year, and the balance of UK tax on it is due by 31 January after that year ends. Her US return for the year of sale shows the gain with no UK tax yet paid.
Several tools may help her. The accrual method of claiming credits, explained in our post on which year takes the UK tax credit, ties UK tax to the US year in which the UK year ends. Unused credits can be carried back one year and forward ten, within the same category. The UK early-arising election may bring the UK charge closer to the US allocation. Each has costs, and the right mix depends on the fund's expected exits, which our tax planning work models year by year. The wider picture of fund and equity income is in our guide to US-UK tax for founders, fund managers and executives.
- Schedule K-1 and K-3 for each fund, with the section 1061 worksheet
- The fund's statement of average holding period for each UK payment
- Dates on which carry was allocated, distributed and received
- A record of UK workdays where residence has changed
- Prior-year Form 1116 carryovers by category
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
