Carried Interest Tax UK US Person Guide: How Both Countries Tax Carry

Carried interest tax UK US person: an introduction

The carried interest tax UK US person rules now pull in opposite directions: since 6 April 2026 the UK taxes carry as trading profits within income tax, while the US can still treat it as long-term capital gain if section 1061 is met. A US citizen fund manager in London therefore reports the same carry twice, under two different labels. The task is to make sure UK tax counts properly against the US bill.

This article explains both sets of rules and where they clash. For the wider picture of how we handle equity and partnership income for senior people, read our guide to US-UK tax for founders and executives. Our treaty relief service page explains how credits are matched across the two returns.

Who the carried interest tax UK US person rules affect

Carried interest is the share of fund profits paid to the managers once investors have received a set return. In private equity, venture capital and real estate funds, it often forms the largest part of a manager's reward. Consequently, a US citizen or green card holder working in a UK fund house faces both regimes at once. That includes Americans on secondment and long-term residents alike.

Getting the carried interest tax UK US person position right starts with the fund paperwork. You need the fund's holding period workings, the partnership statements and a record of where you worked. With those, both returns can describe the same carry consistently, even though the labels differ.

What changed in 2026

Until 5 April 2026, the UK taxed carried interest mainly as a capital gain. GOV.UK's Autumn Budget 2024 overview raised that rate to 32% from 6 April 2025. From 2026 to 2027, however, a new regime applies. Carry now sits inside income tax rather than capital gains tax.

How does the UK tax carried interest from April 2026?

The UK now treats you as carrying on a trade and taxes the carry as trading profits. Only 72.5% of qualifying carried interest is brought into the charge.

The deemed trade

The new rules come from section 58 of the Finance Act 2026, which received Royal Assent on 18 March 2026. It inserts new sections into the Income Tax (Trading and Other Income) Act 2005. Under them, an individual who receives carried interest is treated as carrying on a trade. Therefore, the carry is charged to income tax as trading profits, rather than to capital gains tax.

The 72.5% multiplier

The taxable amount is the non-qualifying profits plus 72.5% of the qualifying profits. GOV.UK's policy paper on the revised tax regime for carried interest confirms the measure has effect from 6 April 2026. In other words, qualifying carry is taxed at income tax rates on less than its full amount. Non-qualifying carry is taxed in full.

National Insurance

Because the carry is treated as trading profits, Class 4 National Insurance can apply too. HMRC's Agent Update 145 says the carry is subject to income tax and, where applicable, Class 4 contributions. It adds that HMRC will publish further guidance on how to declare it for 2026 to 2027. Until that guidance appears, some reporting detail remains open.

What makes carried interest qualifying in the UK?

Carry is qualifying if the fund meets an average holding period condition of at least 40 months. Carry that fails the condition is taxed in full as trading profits.

The average holding period condition

The condition builds on rules previously called the income-based carried interest rules. According to the government response of June 2025, the test looks at whether the fund holds its assets for at least 40 months on average. Buyout funds often meet it. By contrast, funds that trade quickly, such as some credit strategies, may not.

Conditions that were dropped

The government consulted on extra tests before settling the regime. The same response says it will not introduce a minimum co-investment requirement. Similarly, it will not proceed with a minimum holding period for each individual's carry. As a result, the holding period test at fund level is the main gateway.

Why the label matters for US purposes

The UK label does not decide the US treatment. The US looks at its own rules, which focus on how long the fund held each asset. Therefore, the same carry can be qualifying in the UK and short-term in the US, or the reverse. We record both results separately for each distribution.

How does the US tax carried interest?

The US usually taxes carry as the partner's share of the fund's gains, keeping their character. Section 1061, however, demands a three-year holding period for long-term treatment.

Section 1061

Section 1061 applies to an applicable partnership interest, which is an interest held in connection with substantial services. According to 26 USC 1061, gains on such interests are long-term only after three years, not one. The IRS issued final regulations as Treasury Decision 9945 in January 2021. Consequently, gains on assets held for less than three years are recharacterised as short-term.

Assets held for under three years

Funds often sell some assets within three years, for example after a quick refinancing or a partial exit. Gains on those assets are short-term in the US under section 1061, taxed at ordinary rates. Meanwhile, the UK may still treat the same carry as qualifying if the fund-wide average passes 40 months. As a result, the carried interest tax UK US person outcome can differ asset by asset within one fund.

Rates and the net investment income tax

Long-term capital gains are taxed at 0%, 15% or 20%, as the IRS topic on capital gains sets out. Short-term gains are taxed at ordinary rates. In addition, the net investment income tax adds 3.8% on investment income above a threshold. Notably, the IRS questions and answers on that tax say foreign tax credits cannot reduce it.

Partnership reporting

Carry usually comes through a partnership, often a UK limited partnership. A US person with a large enough interest may need Form 8865 for a foreign partnership. Its filing categories turn on control, a 10% interest or certain contributions. Most carry holders fall below the thresholds, but it needs checking for each vehicle.

Where do the UK and US rules clash?

They clash on character, timing and the basket the foreign tax credit falls into. Each clash can leave UK tax that does not offset US tax as expected.

Character

The UK now calls the carry trading income, while the US may call it capital gain. The foreign tax credit sorts income into categories under section 904(d), such as passive and general income. UK tax can only offset US tax on income in the same category. Which category UK tax on deemed trading profits belongs to is not settled by clear guidance. In our view, the cautious approach is to document the position and apply it consistently each year.

Timing

The two countries may tax the same carry in different years. For example, the UK may charge it when it arises to you, while the US follows the fund's own realisation and allocation. When years differ, a credit can arrive in a year with no matching US tax. Unused credits can carry forward, but only within the same category and time limit. Therefore, we track each distribution across both returns.

The net investment income tax gap

The 3.8% tax is a common source of genuine double tax. UK income tax cannot be credited against it under US rules. Some practitioners argue the treaty allows relief, but the IRS position is that it does not. Consequently, a US person with large carry should expect this charge to remain in most years.

Payments on account

Moving carry into income tax also changes the UK payment pattern. Self Assessment payments on account are due by 31 January and 31 July, based on the previous year's bill. Because carry is lumpy, one large year can set high payments on account for the next. You can ask HMRC to reduce them if you expect less income. Therefore, we review the carried interest tax UK US person figures before each payment date.

How does the treaty affect the carried interest tax UK US person position?

The treaty decides which country gives credit first, but it does not remove US tax on a citizen. For most UK residents, the UK taxes first and the US gives credit.

The saving clause

Article 1(4) of the US-UK income tax treaty is the saving clause. It lets the US tax its citizens as if the treaty had not come into effect, subject to listed exceptions. One exception is Article 24, which deals with relief from double taxation. Therefore, the carried interest tax UK US person position starts from full US tax, reduced by credits.

Article 24 and US citizens in the UK

Article 24 sets out how each country gives credit. Its paragraph 6 covers US citizens resident in the UK. In broad terms, the UK need not give credit for US tax charged only because of citizenship on non-US-source income. Consequently, the US normally gives the credit for UK tax on UK-source carry, not the other way round.

Workdays and non-UK services

The UK rules also look at where you worked. The Finance Act counts UK workdays, meaning days with more than three hours of work in the UK. A non-resident with fewer than 60 UK workdays in a year is excluded for that year. Moreover, workdays before a gap of three or more non-UK tax years are ignored. For managers who move between London and New York, this split needs careful records.

A worked example of the carried interest tax UK US person rules

Consider a typical case. Michael is a US citizen and partner at a London buyout fund. In 2026 to 2027, he receives carry from a fund that meets the 40-month average holding period test. The fund's assets were held for more than three years.

On the UK side, 72.5% of his qualifying carry is taxed as trading profits on his Self Assessment return. Class 4 National Insurance may also apply. On the US side, the same carry is long-term capital gain, because section 1061 is met. Next, we claim a foreign tax credit for the UK tax, assigned to the category we have documented. However, the 3.8% net investment income tax remains, because UK tax cannot offset it. As a result, Michael's total tax is mainly UK tax, plus the 3.8% charge. This is an illustrative example, not a real client.

Records Michael keeps

Michael asks the fund for its average holding period workings and the US partnership statements. Additionally, he keeps a workday diary, because he travels to the US for portfolio meetings. Those records support both returns if either tax authority asks questions later.

How US UK Tax Experts can help

US UK Tax Experts prepares the UK and US returns for fund managers from one file, so carry is reported consistently on both. We work through the carried interest tax UK US person rules distribution by distribution, apply credits in the documented category, and track carry-forwards. Our article on US-UK tax for executives covers other forms of senior pay. For wider wealth reporting, see our page on US-UK high-net-worth tax services, which explains the returns we prepare when the carried interest tax UK US person rules sit alongside other investments. We prepare and file returns; we do not give investment or fund structuring advice.

Conclusion

The carried interest tax UK US person position changed sharply on 6 April 2026. The UK now taxes carry as trading profits, with 72.5% of qualifying carry in the charge. The US still applies section 1061 and its own capital gain rules. Matching the two, and accepting the 3.8% charge that credits cannot reach, is the core of getting the returns right.

Contact us

If you receive carry and need both returns prepared together, email hello@usuktaxexperts.com or use our contact form. Tell us which funds pay you carry and where you worked during the year. We reply within one working day.