Carried interest changes for the internationally mobile

The draft legislation published on 21 July provides further clarity on how the tax changes announced in October 2024 will affect inbound and outbound private equity (PE) executives.

The FIG regime applies to individuals coming to the UK either for the first time or after an absence of ten tax years or more. Unlike the old domicile rules, the new regime does not discriminate between UK and non-UK nationals.

Individuals qualifying for the FIG regime do not pay tax on foreign income and gains for the first four years after becoming UK tax resident. Unlike the old rules, this applies even if the income or gains are brought to the UK.

The system is less generous in that it will only apply for the first four tax years of residence and will require disclosure of the foreign income and gains not subject to tax. For those with less complex overseas financial arrangements, who are coming to the UK for a short period of time, the FIG regime should represent a significant simplification. It will make it easier to access overseas capital and comply with tax reporting obligations while resident in the UK.

Mr B has never lived or worked in the UK. He has been working for a fund since 6 April 2022 and is asked to relocate to the UK from abroad on 6 April 2026. He has been part of a carried interest scheme throughout this period. After moving to the UK his working time is divided equally between the UK and overseas.

A £1 million carried interest distribution is made on 5 April 2027. As the individual was not UK tax resident throughout the 10 years prior to becoming UK tax resident, he is eligible for the new foreign income and gains (FIG) regime.

The liability to UK tax is limited to the proportion of UK workdays during the duration of the scheme. He has 116 UK workdays out of a total 1,165 workdays. The apportioned carried interest figure is £99,570 (116/1165 x £1m).

Assuming the carried interest is qualifying, the 72.5% ‘multiplier’ will apply meaning that Mr B is liable to UK tax on a trading profit of £72,188 (£99,570 x 72.5%). Assuming he is liable to income tax and class 4 national insurance contributions as an additional rate taxpayer, the total tax due is £33,928 (£77,188 x 47%).

Individuals who have left the UK will potentially remain liable to tax on carried interest receipts post-departure. This is by way of a day-based time-apportionment between UK and non-UK investment management services.

Guardrails have been put in place to ensure the introduction of the new rules does not adversely affect individuals who have already left the UK or were in the process of leaving the UK at the time of the announcements.

Where an individual is non-UK resident in a tax year then, for the purpose of the apportionment:

• Workdays up to and including 30 October 2024 are deemed as non-UK workdays
• Workdays in a year of non-UK residence, where there are fewer than 60 UK workdays, are deemed as non-UK workdays
• All workdays prior to a period of 3 or more years of non-UK tax residence with fewer than 60 UK workdays, are deemed to be non-UK workdays

Mrs A has been living and working in the UK since 2010 and decides to leave the UK on 6 April 2026. She is not tax resident in the UK for the 2026/27 tax year onwards.

A carried interest distribution of £1m is made to her on 5 April 2028 in respect of a scheme that commenced on 6 April 2020. The liability to tax is limited to the proportion of her UK workdays carried out during the period of the carried interest scheme.

• Days up to and including 30 October 2024: 0 – all days are deemed as non-UK workdays 
• Days from 31 October 2024 to 5 April 2026: 400  
• Days from 6 April 2026 to 5 April 2028: 0 – all days are deemed as non-UK workdays as she is non-UK resident and worked fewer than 60 workdays in the tax year

There were a total of 400 UK workdays during the period out of an overall 2,000 workdays. The apportioned carried interest figure is £200,000 (400/2000 x £1m).

Assuming the carried interest is qualifying, the 72.5% ‘multiplier’ will apply meaning that Mrs A is liable to UK tax on a trading profit of £145,000 (£200,000 x 72.5%). Assuming she is liable to income tax and class 4 national insurance contributions as an additional rate taxpayer the total tax due is £68,150 (£145,000 x 47%).

The facts are as above, but the carried interest distribution is made on 6 April 2029.

At this point, Mrs A has been tax resident outside of the UK for three consecutive tax years and, in each of these years, she has had fewer than 60 UK workdays.

As a consequence, all UK workdays in the entire period are deemed to be non-UK workdays. Mrs A is not liable to UK tax on any of the carried interest distribution received.

The draft legislation has also clarified the position for individuals who were not UK tax resident in the 2025/26 tax year or earlier, who resume tax residence in the UK within five years of departure and who realised a carried interest gain during that period of ‘temporary non-residence’.

These individuals will be treated as carrying on a trade in the year of their return and the profits of the trade will be equivalent to 72.5% of the gain, which accrued during the period of non-residence.

These rules will not impact individuals leaving the UK on or after 6 April 2026.

Ms C left the UK on 6 April 2025. She is not tax resident in the UK for the 2025/26, 2026/27 and 2027/28 tax years and a carried interest distribution of £1m is made to her on 5 April 2028. She returns to the UK on 6 April 2028.

Ms C is caught by the ‘temporary non-residence rules’. The carried interest is deemed to be qualifying and Ms C is liable to UK tax on a trading profit of £725,000 (£1m x 72.5%). Assuming she is liable to income tax and class 4 national insurance contributions as an additional rate taxpayer the total tax due in the year of return is £340,750 (£725,000 x 47%).

The new FIG regime creates significant challenges for existing UK taxpayers and for those who are moving to the UK for the first time but have complex overseas investments arrangements and structures.

Despite these drawbacks, the new rules provide much needed clarity and flexibility for many internationally mobile executives, which should help private equity businesses that are seeking to attract overseas talent or promote internal secondments from their overseas offices.

Approval code: NTEH7082537