HMRC’s latest Agent Update is not subtle. Buried among the usual operational noise is a clean restatement of something every private equity CFO, fund finance lead and carry holder should already have in their cash-flow model: from 6 April 2026, carried interest is taxed as trading profits. Not capital gains. Not a hybrid. Trading income.
That recharacterisation is live. The 2025/26 Self Assessment return still needs the old SA108 capital gains treatment for residual CGT carry. From 2026/27 onwards, the new income tax regime applies in full. HMRC says further guidance on how to declare carry as trading profits will land later this year. Waiting for that guidance before modelling cash is a mistake.
What actually changed on 6 April 2026
The old world was familiar. Qualifying carried interest was largely a capital gains problem, with a 32% CGT rate after the Budget 2024 uplift from 28%. Income-based carried interest (IBCI) sat on the other side of the line for short-hold or income-heavy strategies.
That architecture is gone. Under the new regime:
- All carried interest is treated as the profits of a deemed trade.
- The default charge is income tax plus Class 4 NIC — up to about 47% for an additional-rate taxpayer (45% + 2%).
- Qualifying carried interest gets a 72.5% multiplier, producing an effective rate of roughly 34.1% (around 34.8% in Scotland).
- Co-investment remains outside the carry charge.
- The rules catch a wider set of structures: CIS/AIFs, “round the side” arrangements and enjoyment through connected persons.
Carry is compensation for investment management services. The tax system now treats it that way.
Qualifying carry and the 40-month AHP test
Whether you get the ~34% rate or the full ~47% rate turns on the fund’s average holding period (AHP).
- AHP of 40 months or more: 100% qualifying.
- AHP between 36 and 40 months: partial qualifying on a sliding scale (20% / 40% / 60% / 80%).
- Below 36 months: non-qualifying.
Traditional buyout funds with multi-year equity holds should usually clear 40 months. Credit strategies, continuation vehicles, single-asset co-invests and deal-by-deal models are harder. The AHP calculation is technical: each cash injection starts as its own holding period, then strategy-specific T1/T2 “stretch” rules try to stop follow-ons and partial exits from wrecking the average.
One operational point CFOs miss: AHP is tested when carry arises. Early-life distributions can fail the test even if the fund will later sit comfortably above 40 months. There is a conditionally qualifying claim route if it is reasonable to expect the fund will ultimately meet the AHP. That claim goes in the individual’s tax return for the year the carry arises. Miss the claim and you may lock in the wrong rate until a later retest forces a true-up.
If your house runs multiple strategies, do not assume one AHP answer covers the platform. Map it fund by fund.
The cash-flow shock: payments on account
Because carry is now trading income, it feeds the Self Assessment payments on account regime. Executives who previously sat outside PoA because their only large irregular item was CGT can now be pulled into twice-yearly advance payments based on the prior year’s income tax and NIC.
BDO’s worked example is worth internalising. On £250,000 of qualifying carry in 2026/27, an additional-rate taxpayer is looking at roughly:
- balancing payment of about £85k on 31 January 2028, plus
- a first payment on account of about £43k the same day, and
- a second payment on account of about £43k on 31 July 2028.
In the first year of a material carry event, the combined cash call can approach 68%+ of the receipt if nobody has reserved properly. Non-qualifying carry at ~47% is worse. Late payment interest runs at base rate plus 4%.
CFO actions that help:
1. Build a carry waterfall tax reserve model by individual and by fund.
2. Check whether LPA tax distribution mechanics still work under the new charge and timing.
3. Tell executives, in writing, that a 2026/27 carry receipt can create a January 2028 double hit.
4. Coordinate with personal tax advisers on PoA reduction claims where the following year will clearly be lower — and document the basis.
HMRC’s July reminder and the 2025/26 hangover
Agent Update issue 145 separates two periods cleanly:
- 2025/26: residual CGT treatment for carried interest (other than income-based carry) still goes on SA108. Rate context: 32% from 6 April 2025.
- From 6 April 2026: all carry is trading profits; HMRC will publish further declaration guidance later in 2026.
If your 2026 onboarding pack still talks about CGT as the default, rewrite it this month. Carry now also contaminates the PoA base in a way pure CGT never did.
Scope creep: structures and non-residents
The investment scheme definition is broad (CIS/AIF plus anti-avoidance). Partnership is no longer required. Enjoyment provisions can deem carry to arise to an executive even where legal title sits in a personal company, trust or family vehicle.
For non-UK residents, treating carry as trading income expands the UK’s taxing claim. Liability is generally time-apportioned by UK workdays (more than three hours of investment management services). Helpful relaxations exist for qualifying carry — including pre-30 October 2024 UK workdays, sub-60-day years, and a three-year tail limit — but the record-keeping burden is real. Globally mobile deal teams need contemporaneous workday logs, not reconstructed diaries after a distribution notice.
MTD: on the map, not today’s fire drill
Once carry is trading income, individuals can be pulled toward Making Tax Digital for Income Tax. The earliest pure-carry MTD start is widely expected from 6 April 2028. People already in MTD for other trading or property income can be earlier.
Do not let MTD distract from the 2026/27 cash and AHP work. Do put digital records and a clean fund-finance data feed on the systems roadmap. The separate 7 August 2026 MTD quarterly deadline for the £50k+ ITSA cohort is a different project — do not confuse the calendars.
Seven things to do this quarter
1. Inventory every live carry arrangement — fund-as-a-whole, deal-by-deal, continuation, co-invest adjacent, shadow carry, tax distributions.
2. Run AHP models for each fund with current and expected exits; flag 36–40 month cliff cases.
3. Rewrite executive tax briefings for the 34%/47% split and PoA cash profile.
4. Stress-test LPAs for tax distributions under income tax + NIC, not CGT.
5. Capture UK workday data for non-residents and frequent travellers now.
6. Align personal tax advisers on 2025/26 SA108 vs 2026/27 trading treatment so nobody files the wrong schedule.
7. Board/IC note: one page on firm-level retention risk if net carry economics have moved against UK-based talent.
What this means if you are the CFO
Carry used to be a partner-personal-tax problem that occasionally brushed finance when someone needed a distribution or a leaver calculation. It is now a firm-level cash, data and talent issue.
Your job is not to become everyone’s personal tax agent. Your job is to stop avoidable disasters: wrong AHP assumptions, no tax reserve, silent LPA gaps, or non-resident partners discovering a UK trading charge after the money is spent.
HMRC has told agents the direction of travel in plain English. The remaining uncertainty is administrative detail, not the core charge. Model the cash. Document the AHP. Brief the partners. Then wait for the declaration guidance — with the numbers already in the forecast.
Need a practical review of carry economics, AHP exposure or tax-distribution mechanics across a fund platform? Get in touch.
Sources and further reading
- HMRC Agent Update issue 145 — Capital Gains Tax: carried interest
- BDO — Carried interest reform: how it works
- Travers Smith — The UK’s carried interest tax regime
- Latham & Watkins — UK’s new regime for carried interest taxation
- Goodwin — UK carried interest tax regime and Finance Bill updates
- DLA Piper — UK carried interest key legislative updates
- HMRC — Making Tax Digital for Income Tax: find out if and when you need to use it
- HMRC — Agent Update: Making Tax Digital for Income Tax special edition
- Saffery — Corporate tax update July 2026
- GOV.UK — Check if and when you need to register as a tax adviser with HMRC