UK Trends and Developments Contributed by: Russell Warren and Michael Langan, King & Spalding LLP
Implications of the New Carried Interest Regime for Non-Residents Since 6 April 2026, sums arising in respect of car - ried interest have been taxed as profits of a deemed trade where an individual performs, or has performed, investment management services in any tax year directly or indirectly in respect of a fund. Where the carried interest is “qualifying”, a 72.5% multiplier will apply to the taxable amount, giving an effective top rate of approximately 34.1% for additional rate tax - payers (including Class 4 National Insurance Contri - butions or NICs). Non‑qualifying carried interest will be taxed at rates of up to 47%. While this represents a radical overhaul of the frame - work for taxation of carried interest, the impact in the headline rate of tax is somewhat more understated – carried interest which is neither within the scope of the disguised investment management fee rules, nor the income-based carried interest rules is currently taxed at 32%. For context, “qualifying carried interest” is, broadly, interest which satisfies the average holding period requirements, which replicate the timeframes set out in the income-based carried interest rules. Dis - guised investment management fees will continue to be charged at 47%. One area of significant change is the taxation of non- UK residents. The effect of treating individuals carry - ing on a deemed trade is that non-UK residents will be subject to UK income tax to the extent that profits are attributable to UK-performed investment manage - ment services. This is calculated on the basis of “UK workdays” (any day in which three hours or more are spent in the UK performing investment management services) and apportioned on the basis of days spent working in the UK. This is in contrast to the current regime where non-resident carry holders are not taxed on capital gains funding carried interest if they are not UK tax resident when it arises. In recognition of the potential for double taxation, the government has introduced statutory limitations on the territorial scope of the taxation of qualifying car - ried interest. The proposed limitations are as follows: • any services performed in the UK before 30 Octo - ber 2024 will be deemed to be non-UK services;
which the UK has a double tax treaty containing a non-discrimination article where the other conditions for the exemption are typically met in big-ticket third party financings. Notwithstanding the simplicity of the QPP exemption, application through the treaty pass - port scheme appears to be preferred by the majority of lenders and sponsors in terms of withholding tax exemption. Syndication and other forms of risk sharing are a popular strategy for lenders, often to spread the risk of repayment and also to generate arranger and agent fees. In the case of syndication, the position is straightforward: beneficial entitlement to the inter - est will pass to the syndicate and that entity will be required to establish its own withholding tax position and bear the risk of any “day one” withholding. More complex risk participation arrangements can create withholding tax complexities where, for exam - ple, the day-one lender remains the “lender of record” but it has parted with the beneficial title to the inter - est, for example, where it acts as a form of trustee for other “lenders”. Again that “new lender” is required to demonstrate a withholding tax exemption in order for the full amount of the interest to be paid gross; if it cannot, then the portion of the interest corresponding to that new lender will require to be withheld. This can be problematic where there is reluctance on the part of the day-one lender to disclose the risk participation/existence of the new lender to the bor - rower. There is HMRC guidance which can mitigate this position in the case where the day-one lender is a “treaty lender” and the beneficial owner of the inter - est is also resident in a jurisdiction which provides a full exemption for UK withholding tax. In this sce - nario, HMRC guidance confirms that the full amount of the interest can be paid gross to the day-one lender, notwithstanding it is a conduit, on the basis that its imposition does not alter the overall withholding tax position. This guidance does not, on the face of it, apply to a situation where the day-one lender is not a treaty lender (eg, a UK bank) irrespective of the double tax treaty position of the new lender.
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