HMRC have published new guidance (at IFM37800 and IFM37850) on how carried interest is reported in self-assessment tax returns and what support should be given for the positions taken. 

The guidance emphasises that:

1.    individuals should provide as much supporting information as possible, to minimise the likelihood of compliance checks; and

2.    HMRC expect individuals to use “reasonable efforts” to obtain the information needed to file their return (including the source of any carried interest distributions). Significantly, HMRC say that “relying on tax reporting tailored for other jurisdictions (for example a US tax form) to complete a UK tax return is, absent any steps to obtain further information, unlikely to constitute reasonable care”.

The concept of “reasonable care” is significant as HMRC can only charge penalties for errors in tax returns where the individual has failed to take reasonable care.

Point 2 has the potential to cause concern given (in HMRC’s own words) “the information necessary to accurately report carried interest may not always be readily available despite the fund manager’s best efforts to obtain it”.

HMRC’s example of a US tax form being insufficient is particularly unhelpful, since many fund managers use at least some non-UK focused tax reporting information in preparing their tax returns and this approach has, broadly, been accepted by HMRC to date where UK specific information is not readily available.

Why does the source of carried interest matter?

Under current rules, the source of the profits giving rise to a distribution of non-income based carried interest determines the applicable tax rate. However, obtaining this information is often difficult in practice.

An advantage of the new carried interest regime due to come into force from 6 April 2026 is that the underlying source of profits should cease to determine the way carry distributions are taxed as all carried interest should be subject to an exclusive charge to income tax under the new statutory framework.

How do fund managers obtain the information needed?

Individuals often hold interests in multiple funds. Within each, there may be several transactions giving rise to carried interest in any particular year. Careful analysis of underlying transactions and accounting information is often required, encompassing complex fund structures across different jurisdictions and accounting periods. Consideration of relevant reliefs may require specialist input.

Individual executives often do not have access to the underlying data, or if obtained, it may be time-consuming and expensive to convert into suitable figures to report in their tax return. The new guidance acknowledges this difficulty, but states that “this does not alter the statutory obligation on a UK tax resident individual to account for the correct amount of UK tax on any carried interest… if HMRC suspects the right amount of tax has not been paid, it will take action”.

Managers (especially those with a larger UK presence) are increasingly providing UK “tax packs” to their executives with details of their taxable allocations calculated under UK tax principles. However, this trend has not been universally adopted and, for certain managers (especially those with a smaller population of UK executives), the cost of providing tailored UK tax reporting information may be prohibitive. Meanwhile, information prepared under US tax principles (such as a Schedule K-1) is often more readily available, given many funds already prepare this for their US investors and executives.

Reporting profits based on US, rather than UK, tax principles will naturally lead to some differences, but historically HMRC have (mostly) accepted this practice where it was not practicable/possible to obtain UK tax reporting information, noting that differences should broadly come out in the wash. The new guidance indicates a shift in HMRC’s approach but it is unclear the extent to which US tax reporting information must be interrogated to constitute “reasonable care”.

While the new guidance relates to carried interest, it would be prudent to assume that HMRC will extend this stricter approach to any case where a UK taxpayer prepares their return using an element of US tax information. For example, funds with a significant UK investor base (such as private bank feeders or some funds of funds) that provide UK tax reports to their investors may wish to review their approach, though challenges in obtaining the necessary information from large numbers of underlying funds may be even more pronounced.

Key takeaways

The new guidance is likely to increase the compliance burden and, potentially, the risk of challenge for individuals who have previously relied on non-UK specific tax reporting information in preparing their returns.

While this will be unwelcome news to many, the reform of the UK’s carried interest tax regime from 6 April 2026 means that 2025/26 should be the final tax year impacted.

In the meantime the following should be considered.

• Private capital firms should review what tax reporting information they provide to their UK executives (potentially including “tax packs” if not already the case). Where tax reporting is provided, firms should consider what level of detail is included and whether this could be further tailored to UK taxpayers.
   
• Individual executives and their advisers should consider what supporting information they provide with their tax returns and whether additional disclosures would be appropriate, keeping a clear record of the steps taken to obtain this information.

If you would like to discuss any of the points raised in this note, please get in touch.