From 6 April 2025 to 2026: capital gains tax rates on carry to increase by 4 per cent to 32 per cent from 28 per cent. Interest income and dividend tax rates on carry are to remain untouched — up to 45 per cent and 39.35 per cent, respectively. The increase in the capital gains tax rate means the effective tax rate will therefore also rise from where it is today.
From April 2026: there are some fundamental changes to be made to the regime, the two most important of these are as follows: first, a new flat tax rate of 34.625 per cent — including class 4 national Insurance contributions — will be introduced on capital gains, interest income and dividends (at the highest rate).
This is particularly pleasing as it formed a cornerstone of our comments to HMRC and the Treasury that a flat tax rate would give rise to a simpler and more straightforward carry regime. The big winners here will potentially be credit funds, where carry holders have been subject to higher income tax rates of 45 per cent, and may now be subject to lower tax rates.
Venture capital is likely to be subject to higher tax rates on carry as most carry returns consist of capital gains only and have been subject to capital gains tax at the 28 per cent rate. Real estate, infrastructure and private equity may already be subject to similar effective tax rates of about 34.625 per cent depending on how they are structured.
A second big change is that fund managers — who are employees — will now need to diligence how long the fund holds its assets for in order to benefit from the flat tax rate.
There is also a consultation on additional conditions to benefit from the flat tax rate, which includes a minimum co-invest obligation by the fund management team and a minimum time period to hold carry before being paid out, which may favour "fund as a whole" structures, more common in European structures.
In summary, the fund management industry will most likely be pleased with the outcome of the Budget, notwithstanding the increase to the headline rate of carry. The measures announced deliver a level of certainty and simplification that was missing before and which should be welcomed by all.
Michael Graham is a tax partner at DLA Piper
