Carried interest: London deal‑makers celebrate significant lobbying victory as private equity executives retain favourable tax treatment. Private equity leaders have successfully influenced Treasury policy to maintain attractive carried interest provisions

What is carried interest and why it matters?

“Carried interest,” also known as “carry,” is the profit share fund managers earn from successful investments. Since 2015, the UK has treated this as investment income, taxing it at 28%, slightly above the 20% capital gains tax rate. This tax advantage has drawn criticism for being overly generous, especially as earned income attracted higher tax rates.

From bold Labour plans to cautious adjustments

In 2024, Chancellor Rachel Reeves pledged to close the “carried interest loophole” and tax carry as regular income at 45%, citing concerns over asset‑stripping and fairness. Although she shifted carry into income tax territory during her first Budget, she opted for a 32% rate—with further review—after intense industry lobbying.

Two key policy concessions

The Treasury’s post‑consultation proposals included two significant retreats from initial reform plans:

• Co‑investment requirement dropped: Initial proposals demanded fund managers co‑invest personal capital to access the 32% rate. Officials ultimately acknowledged this requirement was impractical.
• Waiting period eliminated: A proposed 40‑month deferral before carrying interest payouts was also removed, following feedback that it added complexity without enhancing outcomes.

Lobbyists say the changes are pragmatic, critics disagree

Industry voices and Treasury officials term these concessions as technical refinements, not ideological reversals. Michael Moore, CEO of the BVCA, noted the adjustments reflected pragmatic policymaking. Nevertheless, some critics argue the lobbying campaign pressured officials into watering down meaningful change.

Lobby pressures and international tax concerns

The private equity lobby was vigorous. Arguing that excessive tax would drive fund managers abroad, they raised alarms about potential relocation. So far, fears of wholesale exits to Paris or Milan have not materialised. However, questions remain regarding cross‑border tax impacts—especially the potential for double taxation among internationally mobile executives.

Final words from industry and Treasury

The Treasury defends the adjustments, saying they balance fairness and competitiveness in preserving the UK’s status as a premier asset‑management centre. Alvarez & Marsal’s Rhys Owen remarked the revised approach is a pragmatic one that preserves key players in the market.

Notably, both BlackRock and Blackstone have welcomed the direction. BlackRock’s Larry Fink praised the government’s proactive stance, while Blackstone’s president described Reeves’ early actions as “encouraging” and meriting “a lot of credit.”

While the Treasury’s revised carried interest tax measures are less stringent than originally promised, officials argue they reflect careful calibration to ensure long‑term competitiveness. Meanwhile, industry leaders breathe easier, seeing these outcomes as a win for pragmatism over rigidity.