Finance Act 2026

Schedule A1 (1) (1) A sum (including a sum in the form of a loan or advance or an allocation of profits) which arises to an individual from an investment scheme under arrangements is “carried interest” if it arises by way of profit-related return. (2) A sum which arises to an individual from an investment scheme under arrangements does so by way of “profit-related return” if under the arrangements— (a) the sum is to, or may, arise only if— (i) there are profits for a period on the investments, or on particular investments, made for the purposes of the scheme, or (ii) there are profits arising from a disposal of the investments, or of particular investments, made for those purposes, (b) the amount of the sum which is to, or may, arise is variable, to a substantial extent, by reference to those profits, and (c) returns to external investors are also determined by reference to those profits; but where any part of the sum does not meet these conditions, that part is not to be regarded as arising by way of “profit-related return”. (3) But where— (a) one or more sums (“actual sums”) arise to an individual from an investment scheme under the arrangements by way of profit-related return in a tax year, and (b) there was no significant risk that a sum of at least a certain amount (“the minimum amount”) would not arise to the individual from that scheme, so much of the actual sum, or of the aggregate of the actual sums, as is equal to the minimum amount is not “carried interest”. (See sub-paragraphs (7) and (8) as to how the minimum amount is to be apportioned between the actual sums where more than one actual sum arises in the tax year.) (4) For the purposes of sub-paragraph (3)(b) assess the risk both— (a) in relation to each actual sum (and the investments to which it relates) individually, taking into account also any other sums that might have arisen to the individual from that scheme under the arrangements instead of that sum, and (b) in relation to the actual sum or sums and any other sums that might have arisen to the individual from that scheme under the arrangements by way of profit-related return in the tax year (and the investments to which all those sums relate) taken as a whole; (so that, in a particular case, some of the minimum amount may arise by assessing the risk in accordance with paragraph (a) and some by assessing it in accordance with paragraph (b)). (5) For the purposes of sub-paragraph (3)(b) assess the risk as at the latest of— (a) the time when the individual becomes party to the arrangements, (b) the time when the individual begins to perform investment management services directly or indirectly in respect of an investment scheme under the arrangements, and (c) the time when a material change is made to the arrangements so far as relating to the sums which are to, or may, arise to the individual. (6) For the purposes of sub-paragraph (3)(b) ignore any risk that a sum is prevented from arising to the individual (by reason of insolvency or otherwise). (7) Where more than one actual sum arises in the tax year, the minimum amount is to be apportioned between the actual sums as follows for the purposes of sub-paragraph (3)— (a) so much of the minimum amount as is attributable to a particular actual sum is to be apportioned to that actual sum, and (b) so much of the minimum amount as is not attributable to any particular actual sum is to be apportioned between the actual sums on a just and reasonable basis. (8) For the purpose of sub-paragraph (7) any part of the minimum amount is attributable to a particular actual sum to the extent that there was no significant risk that that part would not arise to the individual in relation to that actual sum, assessing the risk in accordance with sub-paragraph (4)(a). (9) See also paragraphs 2 to 5 which set out when certain sums are to be treated and not treated as carried interest. (2) (1) A sum arising to an individual from an investment scheme under arrangements which falls within sub-paragraph (2) or (3)— (a) is to be assumed to meet the conditions in paragraph 1(2), (b) is to be assumed to not be a sum in relation to which paragraph 1(3) applies, and (c) accordingly, is to be treated as constituting “carried interest”. (2) A sum falls within this sub-paragraph if, under the arrangements, it is to, or may, arise to the individual out of profits on the investments made for the purposes of the scheme, but only after— (a) all, or substantially all, of the investments in the scheme made by the participants have been repaid to the participants, and (b) each external investor has received a preferred return on all, or substantially all, of the investor's investments in the scheme. (3) A sum falls within this sub-paragraph if, under the arrangements, it is to, or may, arise to the individual out of profits on a particular investment made for the purposes of the scheme, but only after— (a) all, or substantially all, of the relevant investments made by participants have been repaid to those participants, and (b) each of those participants who is an external investor has received a preferred return on all, or substantially all, of the investor's relevant investments; and for this purpose “relevant investments” means those investments in the scheme to which the particular investment made for the purposes of the scheme is attributable. (4) In this paragraph “preferred return” means a return of not less than the amount that would be payable on the investment by way of interest if— (a) compound interest were payable on the investment for the whole of the period during which it was invested in the scheme, and (b) the interest were calculated at a rate of 6% per annum, with annual rests. (3) (1) Sub-paragraph (2) applies to consideration that is received or receivable— (a) by an individual for the disposal, variation, loss or cancellation of the individual’s right to a sum arising from an investment scheme under arrangements by way of profit-related return, or (b) by a person who is a relevant person in relation to the individual, for the disposal, variation, loss or cancellation of the relevant person’s right to a sum arising from an investment scheme under arrangements by way of profit-related return. (2) The consideration, to the extent that it is not a disguised fee arising to the individual for the purposes of section 809EZA of ITA 2007— (a) is to be treated as a sum which arises to the individual from the scheme under the arrangements by way of profit-related return at the time of the disposal, variation, loss or cancellation, and (b) accordingly, is to be treated as constituting “carried interest”. (3) For the purposes of sub-paragraph (1), a person is a “relevant person” in relation to an individual if carried interest arising to that person would be treated as arising to the individual for the purposes of section 23I (see paragraph 7 and paragraph 8 of this Schedule). (4) (1) A tax distribution arising to an individual from an investment scheme under arrangements is to be treated as constituting “carried interest”. (2) A sum which arises to an individual from an investment scheme under arrangements is a “tax distribution” if— (a) under the arrangements the sum is to, or may, arise only if tax (including non-UK tax within the meaning of Part 5 of CTA 2010) becomes payable or is expected to become payable as a result of any individual’s entitlement to carried interest under the arrangements, and (b) the sum arising to the individual results in a corresponding deduction in the individual’s entitlement to carried interest. (5) (1) A sum which arises to an individual from an investment scheme under arrangements by way of profit-related return is not to be treated as “carried interest” to the extent that it constitutes a co-investment repayment or return. (2) In sub-paragraph (1)— - “co-investment”, in relation to an individual and a scheme, means an investment made directly or indirectly by the individual, or a person who is connected with the individual, in the scheme, where there is no return on the investment which is not an arm's length return within the meaning of section 809EZB(2) of ITA 2007; - “co-investment repayment or return” means a repayment in whole or in part of, or a return on, a co-investment. (3) Section 993 of ITA 2007 (meaning of “connected”) applies for the purposes of this paragraph but as if— (a) subsection (4) of that section were omitted, and (b) partners in a partnership in which the individual is also a partner were not “associates” of the individual for the purposes of sections 450 and 451 of CTA 2010 (“control”). (6) (1) In this Part of this Schedule, “profits”, in relation to an investment made for the purposes of an investment scheme, means profits (including unrealised profits) arising from the acquisition, holding, management or disposal of the investment (taking into account items of a revenue nature and items of a capital nature). (2) In this Part of this Schedule a reference to an investment made by a person in an investment scheme is a reference to a contribution by the person (whether by way of capital, loan or otherwise) towards the property subject to the scheme (but does not include a sum committed but not yet invested). (3) For the purposes of sub-paragraph (2) a person who holds a direct or indirect interest in an investment scheme and who acquired the interest from a person other than the scheme is to be taken to have made a contribution towards the property subject to the scheme equal to— (a) the consideration given by the person for the acquisition of the interest, or (b) if less, the market value within the meaning of the TCGA 1992 (see sections 272 and 273 of that Act) of the interest at the time of the acquisition. (4) In this Part of this Schedule, in relation to an investment scheme which is a company limited by shares— (a) references to a repayment of, or a return on, an investment in the scheme include a repayment of, or a return on, an investment represented by a share in the scheme resulting from— (i) the purchase of the share by the scheme, (ii) the redemption of the share by the scheme, (iii) the distribution of assets in respect of the share on the winding up of the scheme, or (iv) any similar process; (b) references to a return on an investment in the scheme include a dividend or similar distribution in respect of a share in the scheme representing the investment. (7) (1) This paragraph applies in relation to an individual (“A”) if— (a) a sum arises to a person (“B”) who is connected with A, (b) B is not a company, and (c) the sum does not arise to A apart from this paragraph. (2) The sum referred to in sub-paragraph (1)(a) arises to A for the purposes of this Schedule and this group of sections. (3) Where a sum arises to A by virtue of this paragraph, it arises to A at the time the sum referred to in sub-paragraph (1)(a) arises to B. (4) Section 993 of ITA 2007 (meaning of “connected”) applies for the purposes of this paragraph but as if— (a) subsection (4) of that section were omitted, and (b) partners in a partnership in which A is also a partner were not “associates” of A for the purposes of sections 450 and 451 of CTA 2010 (“control”). (8) (1) This paragraph applies in relation to an individual (“A”) if— (a) a sum arises to— (i) a company connected with A, or (ii) a person not connected with A, (b) any of the enjoyment conditions are met, and (c) the sum does not arise to A apart from this paragraph. (2) The enjoyment conditions are— (a) the sum, or part of the sum, is in fact so dealt with by any person as to be calculated at some time to enure for the benefit of A or a person connected with A; (b) the arising of the sum operates to increase the value to A or a person connected with A of any assets which— (i) A or the connected person holds, or (ii) are held for the benefit of A or the connected person; (c) A or a person connected with A receives or is entitled to receive at any time any benefit provided or to be provided out of the sum or part of the sum; (d) A or a person connected with A may become entitled to the beneficial enjoyment of the sum or part of the sum if one or more powers are exercised or successively exercised (and for these purposes it does not matter who may exercise the powers or whether they are exercisable with or without the consent of another person); (e) A or a person connected with A is able in any manner to control directly or indirectly the application of the sum or part of the sum. In this sub-paragraph, in a case where the sum referred to in sub-paragraph (1)(a) arises to a company connected with A, references to a person connected with A do not include that company. (3) There arises to A for the purposes of this Schedule and this group of sections— (a) the sum referred to in sub-paragraph (1)(a), or (b) if the enjoyment condition in sub-paragraph (2)(a), (c), (d) or (e) is met in relation to part of the sum, that part of that sum, or (c) if the enjoyment condition in sub-paragraph (2)(b) is met, such part of that sum as is equal to the amount by which the value of the assets referred to in that condition is increased. (4) Where a sum (or part of a sum) arises to A by virtue of this paragraph, it arises to A at the time it arises to the person referred to in sub-paragraph (1)(a)(i) or (ii) (whether the enjoyment condition was met at that time or at a later date). (5) In determining whether any of the enjoyment conditions are met in relation to a sum or part of a sum— (a) regard must be had to the substantial result and effect of all the relevant circumstances, and (b) all benefits which may at any time accrue to a person as a result of the sum arising as specified in sub-paragraph (1)(a) must be taken into account, irrespective of— (i) the nature or form of the benefits, or (ii) whether the person has legal or equitable rights in respect of the benefits. (6) The enjoyment condition in sub-paragraph (2)(b), (c) or (d) is to be treated as not met if it would be met only by reason of A or a person connected with A holding shares or an interest in shares in a company. (7) The enjoyment condition in sub-paragraph (2)(a) or (e) is to be treated as not met if the sum referred to in sub-paragraph (1)(a) arises to a company and— (a) the company is liable to pay corporation tax in respect of its profits and the sum is included in the computation of those profits, or (b) sub-paragraph (a) does not apply but— (i) the company is a CFC and the exemption in Chapter 14 of Part 9A of TIOPA 2010 applies for the accounting period in which the sum arises, or (ii) the company is not a CFC but, if it were, that exemption would apply for that period. In this sub-paragraph “CFC” has the same meaning as in Part 9A of TIOPA 2010. (8) But sub-paragraphs (6) and (7) do not apply if the sum referred to in sub-paragraph (1)(a) arises to the company referred to in sub-paragraph (1)(a)(i) or the person referred to in sub-paragraph (1)(a)(ii) as part of arrangements where— (a) it is reasonable to assume that in the absence of the arrangements the sum or part of the sum would have arisen to A or an individual connected with A, and (b) it is reasonable to assume that the arrangements have as their main purpose, or one of their main purposes, the avoidance of a liability to pay income tax, capital gains tax, inheritance tax or corporation tax. (9) The condition in sub-paragraph (8)(b) is to be regarded as met in a case where— (a) the sum arose from an investment scheme, (b) the sum is applied directly or indirectly as an investment in an investment scheme, and (c) the persons providing investment management services to the schemes mentioned in paragraphs (a) and (b) are the same or substantially the same. (10) Section 993 of ITA 2007 (meaning of “connected”) applies for the purposes of this paragraph, but as if— (a) subsection (4) of that section were omitted, and (b) partners in a partnership in which A is also a partner were not “associates” of A for the purposes of sections 450 and 451 of CTA 2010 (“control”). (9) (1) But paragraph 8 does not apply in relation to a sum arising to— (a) a company connected with A, or (b) a person not connected with A, for as long as the sum is a deferred sum in relation to A. (2) In this paragraph, “deferred sum”, in relation to A— (a) means a sum where the provision of the sum to A or a person connected with A is deferred (whether pending the meeting of any conditions (including conditions which may never be met) or otherwise), and (b) includes A's share (as determined on a just and reasonable basis) of any sum the provision of which to A and one or more other persons, taken together, has been deferred (whether pending the meeting of any conditions (including conditions which may never be met) or otherwise). In this sub-paragraph, in a case where the sum referred to in sub-paragraph (1) arises to a company connected with A, the reference to a person connected with A does not include that company. (3) Where— (a) paragraph 8 has been disapplied in relation to a deferred sum by virtue of sub-paragraph (1), and (b) the sum ceases to be a deferred sum in relation to A, the sum is to be regarded as arising to the company or person mentioned in sub-paragraph (1) at the time it ceases to be a deferred sum. (4) Section 993 of ITA 2007 (meaning of “connected”) applies for the purposes of this paragraph but as if— (a) subsection (4) of that section were omitted, and (b) partners in a partnership in which A is also a partner were not “associates” of A for the purposes of sections 450 and 451 of CTA 2010 (“control”). (5) A sum which is deferred carried interest within the meaning of section 103KG(3) of TCGA 1992 when this paragraph comes into force is to be treated for the purposes of sub-paragraph (3) as a deferred sum in relation to which paragraph 8 has been disapplied virtue of sub-paragraph (1). (10) (1) Paragraph 9 does not apply in relation to any sum in relation to which the condition in sub-paragraph (8)(b) of paragraph 8 is met by virtue of sub-paragraph (9) of that paragraph. (2) Paragraph 9 also does not apply if— (a) it is reasonable to assume that the deferral referred to in sub-paragraph (2) of paragraph 9 is not the effect of genuine commercial arrangements, or (b) that deferral is the effect of such arrangements but it is reasonable to assume that the arrangements have as their main purpose, or one of their main purposes, the avoidance of a liability to pay income tax, capital gains tax, corporation tax or inheritance tax. (3) In sub-paragraph (2), “genuine commercial arrangements” means arrangements involving A (alone or jointly with others performing investment management services) and external investors in the investment scheme. (11) (1) This Part of this Schedule determines when carried interest arising to an individual from an investment scheme is “qualifying carried interest” for the purposes of section 23I. (2) Paragraph 12 contains the general rule, under which the extent to which carried interest is qualifying carried interest depends on the average holding period of the investment scheme. (3) Chapters 2 to 5 of this Part contain further provision relating to average holding periods. (4) Chapter 6 contains an exception to the general rule for carried interest which is treated as being 100% qualifying carried interest. (5) Chapters 7 and 8 contain supplementary and interpretative provision. (6) Nothing in this Part of this Schedule affects the liability to any tax of— (a) the investment scheme, or (b) external investors in the investment scheme. (12) (1) “Qualifying carried interest” is the relevant proportion of a sum of carried interest arising to an individual from an investment scheme. (2) The relevant proportion is determined by reference to the investment scheme's average holding period as follows.