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Carried interest

The difference between UK vs US tax treatment

Alex Conway, Director, Professional Practices
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Over the past ten years there has been an influx of US private equity houses becoming global businesses, usually setting up their European headquarters in London. This has meant many US citizens becoming UK tax resident and being subject to UK taxes. However, recently we have seen an increase in UK private equity houses establishing themselves in the US and sending executives to America to expand the business and tap into the US market.

One of the key returns Investment Management executives receive is carried interest (the long-term fund performance reward for outperforming the fund hurdle) and due to its long-term nature, it has historically been subject to capital gains tax rather than income tax.

However, despite the UK & US having many similarities, the taxation of carried interest is not one.

What are the differences between the UK and US in the taxation of carry?

  UK  US
 When is carry taxed?  Receipts basis - when cash is received (broadly)  Accruals basis - as the carry accrues in the fund
'Dry' tax?  Unlikely Yes
Tax rate  28% (capital return) 45%/39.35% (income return)  23.8% (long term capital gain) 40.3% (income return) State taxes may also apply
Short holding period of assets in the fund  Income-based carried interest rules apply where assets not held for 40 months on average – 45% tax rate  Holding period rules apply where assets not held for three years – 40.3% tax rate plus state taxes

Investment Management executives working both in the US and UK should be aware of the above differences in the taxation of carry, especially if they meet the residence requirements in their ‘new’ work jurisdiction.

Historically, the UK/US ‘double tax’ treaty has prevented double tax arising on carried interest that is taxable in both jurisdictions, and this was reflected in HMRC’s manuals. However, in February 2022, HMRC removed from their manuals non-UK taxes from the no double tax provision. The impact of this meant that a UK tax resident/ US citizen could pay up to 51.8% tax (28% in the UK and 23.8% in the US) on their carried interest, whereas previously they would have been subject to 28% tax.

It is unclear what caused HMRC to make this change, although the British Private Equity & Venture Capital Association (BVCA) and other industry representatives are currently in discussion with HMRC regarding this issue, with hope that a suitable resolution can be found for those potentially affected. Meanwhile, any individuals who are assessable to tax in more than one jurisdiction or thinking of moving jurisdictions should be aware of the tax implications associated with their carried interest and this potential issue and take appropriate advice.

For more information on the issues discussed in this article, get in touch with Alex Conway or your usual Crowe contact.


There has been a trend towards the use of preference shares in private equity backed management buyout transactions.

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