United Kingdom
With effect from 6 April 2026, the UK’s new carried interest regime comes into force, representing a significant change in how carried interest holders are taxed. Under the revised framework, which applies to all carried interest returns (not only amounts previously treated as capital gains but also ongoing profit allocations and distributions), carried interest will fall fully within the income tax regime, treated as trading profits rather than capital gains, reflecting the UK’s policy shift towards taxing carried interest in line with its characterisation as remuneration for investment management services rather than as a return on capital.
A central feature of the new rules is the introduction of a 34.1% effective tax rate for qualifying carried interest, achieved by applying a 72.5% multiplier to the taxable portion of profits. Qualification depends on a fund’s average holding period, determined under enhanced rules adapted from the existing Income-Based Carried Interest (IBCI) framework. These rules introduce additional complexity, requiring detailed tracking of holding periods across investment strategies such as real estate, credit, and fund-of-funds. Where carried interest does not meet the qualifying conditions, it may be subject to income tax and Class 4 NICs at rates of up to 47%, representing a materially higher tax burden for shorter‑term or non‑qualifying awards.
In addition, non‑UK tax resident carry recipients will need to keep track of their “UK workdays”. If they spend 60 or more “workdays” in the UK, they may become liable to UK income tax on the carried interest received. This may prompt certain US‑based carry holders who fall within scope of UK income tax to structure their carried interest so that HMRC taxes them earlier (for example, by granting a valuable interest) and ensuring that the US recognises the income in the same year, such as through the use of an 83(b) election in order to support US foreign tax credit relief. As a result, close monitoring of international travel and working patterns is advisable.
The regime also includes several elections that can be made, including an irrevocable annual election allowing individuals to apply ordinary trading principles where appropriate. In such cases, the 72.5% multiplier does not apply, and standard trading reliefs – such as expense deductions and loss relief – are available, which may improve the after‑tax position in some circumstances.
All carried interest payments received on or after 6 April 2026, regardless of when awarded, will be taxed under the new UK rules. This may require a review of existing fund structures, waterfall mechanics, and carry vehicles to ensure anticipated tax outcomes are as expected under the revised framework, as well as implementing procedures to track UK workdays for non-UK tax residents.
Luxembourg
With effect from 1 January 2026, Luxembourg has fundamentally reshaped its carried interest tax regime. The reform replaces a narrow framework with a more predictable regime that better reflects how carried interest is structured in practice across alternative asset managers.
The new rules rely on a broader definition of carried interest, focusing on performance-based remuneration linked to the outperformance of an alternative investment fund (AIF) above a genuine hurdle rate, rather than on formalistic or employment-based criteria. This matters in practice. Under the previous regime, eligibility was largely limited to employees of the AIF manager or management company, leaving uncertainty for other carry holders. From 2026, any Luxembourg-resident individual directly or indirectly involved in the management of an AIF may qualify, irrespective of the contractual or corporate channel through which the carry is granted.
Importantly, the reform removes the requirement that investors fully recover their invested capital before carried interest can accrue. As a result, the new tax treatment also applies to deal-by-deal waterfall structures. The rules apply irrespective of whether the AIF or carry structure takes the form of a tax-opaque entity or a tax-transparent partnership.
The reform further draws a clear distinction between contractual carry and participation-based carry. Contractual profit-sharing rights are taxed as extraordinary income at one quarter of the progressive income tax rate, resulting in a rate of up to 11.45%. Where carried interest is structured through a genuine equity or fund participation, the resulting income may instead fall within the capital gains regime, including a full exemption after a six-month holding period where the interest does not represent a substantial participation, i.e., more than 10%.
The reforms introduced in the UK and Luxembourg mark a notable move toward more consistent and transparent taxation of performance-based remuneration. As both regimes take effect from 2026, fund groups should assess the impact on their existing carried interest structures, cross border arrangements, and operational processes to ensure they remain aligned with the updated rules.