Capital Gains Planning for Private Equity Executives Across the US and UK The capital gains planning private equity executives need is unlike any other tax challenge — and most advisers aren’t equipped to handle it. A private equity executive working across the US and UK faces capital gains events that can generate millions in tax […]
The capital gains planning private equity executives need is unlike any other tax challenge — and most advisers aren’t equipped to handle it.
A private equity executive working across the US and UK faces capital gains events that can generate millions in tax liability in a single year.
Carried interest. Co-investment gains. Exit proceeds. Secondary fund stakes. Each is treated differently by the IRS and HMRC.
And if you’re living in one country while your fund is domiciled in another, the interaction of both tax systems can be brutal without specialist planning.
This guide explains the key capital gains issues PE executives face — and the planning tools available in 2026.
Our US-UK cross-border tax service is at https://www.jungletax.co.uk/services/us-expat-tax/
PE executives generate capital gains from multiple sources: carried interest allocations, direct co-investment gains, management equity in portfolio companies, and secondary fund stakes.
Each source has its own holding period rules, tax rate, and cross-border treatment.
Carried interest is taxed as long-term capital gain in the US if the underlying fund assets are held for more than three years — under the IRC Section 1061 three-year holding period rule introduced by the Tax Cuts and Jobs Act.
In the UK, carried interest is taxed at a flat 28% rate under the UK’s specific carried interest regime — different from standard CGT rates.
A US citizen working in London at a Cayman-domiciled fund faces US tax on worldwide income and UK tax on UK-resident income.
Both countries claim taxing rights on carried interest and co-investment gains — unless the US-UK Double Taxation Treaty allocates them correctly.
Article 13 of the treaty governs capital gains. But the interaction with carried interest — which straddles income and gains characterisation — is technically complex.
This cross-border complexity is exactly why specialist capital gains planning private equity executives need exists as a distinct advisory discipline.
https://www.irs.gov/taxtopics/tc409
Under IRC Section 1061, carried interest is taxed at short-term capital gains rates — ordinary income rates up to 37% — if the underlying assets are held for less than three years.
If the fund holds assets for more than three years, the carried interest qualifies for long-term capital gains rates — currently 20% plus 3.8% NIIT at the top rate.
Planning the fund’s holding period around the three-year threshold is a standard part of US PE tax strategy.
Co-investments made directly — outside the fund structure — are subject to standard long-term capital gains rules without the Section 1061 restriction.
In the UK, carried interest is taxed at a flat 28% rate for higher-rate taxpayers — separate from the standard CGT regime.
UK carried interest rules apply to executives who are UK-resident when the carried interest arises — regardless of where the fund is domiciled.
The interaction of UK 28% carried interest tax and US long-term capital gains tax — both on the same economic gain — requires the US-UK treaty to be applied correctly to avoid double taxation.
Effective capital gains planning private equity executives undertake must address both the Section 1061 holding period and the UK 28% carried interest rate simultaneously.
https://www.gov.uk/government/publications/carried-interest-rules
Direct co-investments — where the executive personally invests alongside the fund — are treated as standard capital assets.
In the US, gains are long-term capital gains if held more than one year: 20% plus 3.8% NIIT at the top federal rate.
In the UK, gains are CGT at 24% for higher-rate taxpayers on the disposal of non-residential assets.
The treaty and FTC can eliminate most of the double charge — but only if the disposal is planned and documented correctly.
If you’re planning to leave the UK — or arrive in the US — the timing of co-investment disposals is critical.
Disposing before becoming UK-resident removes the UK CGT exposure entirely on that asset.
Disposing before becoming US-resident removes US tax exposure on the pre-arrival gain.
Both are legally available planning opportunities — and both are routinely missed by executives who don’t seek specialist advice before a move.
List every asset that could generate a capital gain: carried interest positions, co-investments, management equity, fund stakes, and personal investments.
For each, identify the country of domicile of the asset, the country of your residence when the gain arises, and the applicable treaty article.
Review the fund’s portfolio company holding dates. Identify which positions have passed the three-year mark.
For positions approaching the three-year threshold, co-ordinate with fund counsel to confirm the holding period calculation.
This holding-period analysis is a core part of capital gains planning private equity executives should complete at least six months before any fund exit or distribution.
Article 13 of the US-UK treaty allocates taxing rights on capital gains. For UK-situs assets, the UK generally has primary taxing rights.
For assets in third countries — Cayman, Luxembourg, Delaware — the analysis depends on the nature of the asset and the executive’s residence.
Each gain requires a separate treaty analysis. A single fund exit can generate multiple gain categories with different treaty treatments.
For each gain taxed in both countries, calculate the FTC available under Form 1116.
Carried interest and co-investment gains generally fall into the general income basket — not the passive basket.
Excess credits can be carried forward 10 years. Timing multiple disposals across years maximises credit usage.
If you’re relying on the treaty to modify your US tax treatment — for example, treating a UK gain as not taxable in the US — you must file Form 8833 with your Form 1040.
This is mandatory, not optional. Missing it — even when the treaty position is correct — can result in penalties.
https://www.irs.gov/forms-pubs/about-form-8833
A US citizen — we’ll call him Richard — was a managing director at a London-based PE fund. The fund exited a major portfolio company, generating £1.8 million in carried interest for Richard.
The portfolio company had been held for 42 months — clearing the Section 1061 three-year threshold for US purposes.
UK carried interest tax at 28%: approximately £504,000. US federal long-term capital gains at 23.8%: approximately $538,000 (on the USD equivalent).
Without treaty and FTC planning, Richard faced combined tax approaching 50% of the carried interest received.
The Jungle Tax team applied Article 13 of the US-UK treaty and prepared Form 1116 claiming FTC for the UK carried interest tax paid.
The £504,000 UK tax translated to approximately $630,000 USD — exceeding the US federal liability of $538,000.
Result: zero additional US federal tax due. Excess FTC of approximately $92,000 carried forward to offset future US liability.
Form 8833 was filed to document the treaty position. The combined effective rate fell from approximately 50% to 28% — the UK rate only, as intended by the treaty.
This outcome is achievable through proactive capital gains planning private equity executives should undertake well before any fund distribution or exit event.
Failing to track the holding period for each carried interest position means some distributions are taxed at ordinary income rates unnecessarily.
With proper fund-level documentation, many distributions can be restructured to clear the three-year mark.
The most common and most expensive error. UK carried interest tax at 28% is fully creditable against US federal liability.
Without Form 1116, executives pay in both countries on the same carried interest distribution.
New York and California impose state income tax on carried interest distributions — at rates up to 13.3% in California.
State tax is an additional layer that must be factored into exit planning. Residency changes before a distribution can eliminate state exposure.
A UK tax adviser handles the UK carried interest tax. A US adviser handles Form 1040. Neither knows what the other is doing.
The FTC calculation requires both filings to be coordinated. Separate advisers routinely produce uncredited, duplicated tax payments.
https://www.icaew.com/insights/viewpoint-article/2024/feb-2024/tax-guide-for-expats
Jungle Tax specialises in capital gains planning private equity executives across the UK and US.
Our team handles the full cross-border capital gains compliance package: Form 1040 with Form 1116 FTC, Form 8833 treaty positions, UK CGT reporting, FBAR, and Form 8938 FATCA.
We’re members of the Chartered Institute of Taxation (CIOT) and hold US tax qualifications including IRS Enrolled Agent credentials.
Our cross-border tax service is at https://www.jungletax.co.uk/services/us-expat-tax/. Contact: hello@jungletax.co.uk | 0333-8807974.
Fund exit approaching? Co-investment disposal planned? Don’t leave cross-border capital gains planning until it’s too late.
Email: hello@jungletax.co.uk
Phone: 0333-8807974
Web: https://www.jungletax.co.uk/contact/
In the US: long-term capital gains rates (20% + 3.8% NIIT) if the underlying assets are held more than three years under Section 1061.
In the UK: flat 28% carried interest rate for higher-rate taxpayers, regardless of holding period.
IRC Section 1061 taxes carried interest as ordinary income if underlying assets are held less than three years.
Distributions after the three-year mark qualify for long-term capital gains rates — currently 20% at the top federal rate.
Yes — if the disposal occurs before the date you become UK-resident.
UK CGT applies to UK-resident individuals on worldwide gains. Pre-residence disposals are not subject to UK CGT.
Possibly — if your carried interest is held in or generates income through a foreign financial account.
Cayman or BVI vehicles that hold fund assets may trigger FBAR obligations for the underlying accounts.
A specialist adviser will identify whether any carried interest structure generates a personal FBAR obligation.
