For a UK-based crypto fund manager approaching the first portfolio exit or the next institutional raise, two issues crystallise simultaneously: the tax treatment of carried interest, which determines whether the GP pays 28% or 47% on the carry return; and AIFMD compliance, which determines whether the fund can access EU institutional LP capital at all. Both require analysis before the event, not after.
Part One: UK Carried Interest Tax for Crypto Fund Managers
From 6 April 2026 the UK has fundamentally re‑designed its carried‑interest regime: carry is now taxed, with specific rules, as trading income rather than by reference to the underlying fund gains. This creates sharper consequences for expatriates, mobile managers and new UK residents, especially in crypto and alternative‑asset strategies.
New architecture
Traditionally, carry was treated as a capital gain where it genuinely tracked fund returns, aligned the manager economically with external investors and was not simply an embedded success‑fee or bonus. Over time, HMRC introduced tests to re‑characterise “short‑term” or bonus‑like arrangements as income, but the starting point was still CGT.
Under the 2026 reforms, sums that arise to an individual in respect of carried interest linked to investment‑management services are treated as profits of a deemed trade and charged to income tax and NIC. Carry is now effectively part of the ordinary income‑tax system, including PAYE/withholding, reporting and governance obligations at manager level.
A key mitigant is “qualifying carried interest”: where conditions (mainly average holding period) are met, only 72.5% of the carry is treated as taxable trading profit, giving an effective rate in the mid‑30s percent for top‑rate taxpayers instead of full marginal income‑tax plus NIC.
For crypto and venture funds, quick token liquidity or early exits can depress the AHP, so this needs to be modelled well before the first realization.
International aspects and FIG regime
The regime also applies to non‑UK residents to the extent the carry is linked to UK work days – broadly, days on which the manager performs a minimum amount of relevant work in the UK.
UK law now treats carry as trading income, but treaty partners may see the same amounts as capital gains, creating potential mismatches and double‑tax risks if neither side gives full credit for tax paid under a different character. This keeps residence analysis and permanent‑establishment questions firmly on the agenda for mobile fund managers.
From 6 April 2025 the Foreign Income and Gains (FIG) regime replaces the remittance basis, offering a four‑year exemption for qualifying newcomers on foreign‑source income and gains. Because the new rules classify carry as UK‑source trading income where the relevant services are performed in the UK, FIG will only be applicable up and to the extent that Work Days Relief (WDR) allows a portion of that trading income to be treated as foreign by reference to non‑UK work days. In practice, a carried‑interest beneficiary who qualifies for FIG will need both a FIG claim and a carefully documented WDR calculation if they are to reduce UK tax on carry linked to cross‑border work.
CRYPTO-SPECIFIC RISK
The 40-month average holding period requirement is a significant risk for crypto venture funds that have made early-stage protocol investments. Where a token’s liquidity event occurs within 40 months of investment, the qualifying asset condition may not be met. If this brings the fund’s average holding period below 40 months, the entire carry may be disqualified. This analysis needs to be run before the first token becomes liquid — not after the LP distribution is made.
Co-Investment Arrangements
Co‑investment arrangements by the GP alongside the fund are distinct from carried interest. A genuine, pari passu co‑investment – funded and held on normal investor terms, with no preferential financing from the fund – will usually be treated as a direct capital investment, with gains taxed under the normal capital gains rules rather than the carried interest regime. By contrast, structures that give the GP an economic slice of fund‑level upside through loans or other support from the fund, but label it “co‑investment”, risk being challenged by HMRC as disguised carried interest or employment‑related reward, so careful structuring and documentation. The documentation of the arrangement is therefore critical.
What to Do Before the First Realisation
- Commission a carried interest review, identifying any risks from the holding period requirement, and documenting the co-investment arrangements
- Review the FIG position for any non-domiciled GPs before the distribution is accrued/made
- Ensure the LP distribution mechanics in the LPA are consistent with the tax analysis — the order of distributions, the hurdle rate, and the clawback provisions each have tax consequences
Part Two: AIFMD and EU Institutional LP Access
The Alternative Investment Fund Managers Directive was introduced in 2011 to regulate EU-based alternative investment fund managers and the marketing of alternative investment funds to EU investors. Following Brexit, UK AIFMs are treated as third-country AIFMs — which means that marketing a UK-managed fund to EU institutional investors requires compliance with each EU member state’s national private placement regime (NPPR), not with the AIFMD marketing passport.
The National Private Placement Regime
AIFMD Article 42 sets out the framework for third-country AIFMs wishing to market AIFs to professional investors in EU member states. Each member state may permit marketing under its NPPR, subject to conditions that include (at minimum):
- A notification to the relevant member state regulator
- Appropriate cooperation arrangements between the FCA and the member state regulator
- The AIF’s home jurisdiction not being on the FATF’s list of non-cooperative countries
- The third-country AIFM and AIF complying with the AIFMD’s transparency and reporting requirements
In practice, the conditions differ significantly between member states. Germany, France, the Netherlands, and Luxembourg generally have straightforward NPPR processes for UK AIFMs. Several member states have closed their NPPRs to third-country AIFMs entirely, requiring marketing through an EU sub-threshold AIFM or a fully AIFMD-compliant structure.
THE TIMING PROBLEM
NPPR notifications typically take four to eight weeks to process. The analysis needs to be completed before the LP conversation begins — not after a term sheet has been issued. A UK-managed Cayman ELP that has not completed NPPR notifications cannot be marketed to an EU institutional LP, regardless of the LP’s interest or the fund’s performance.
Structural Alternatives
Where the NPPR route is unavailable, closed, or administratively impractical, the structural alternatives for EU investor access are:
- Luxembourg SCSp (Special Limited Partnership): A Luxembourg-law fund vehicle managed by an EU-authorised AIFM. The SCSp structure is familiar to EU institutional LPs and compatible with the full AIFMD marketing passport. The tax treatment is transparent — each LP’s share of income and gains is taxed in the LP’s own jurisdiction.
- Parallel fund structure: The Cayman ELP (for non-EU LPs) runs in parallel with a Luxembourg SCSp or Irish ICAV (for EU LPs). Both vehicles invest alongside each other in the same portfolio on equivalent economic terms. This allows the fund manager to maintain a single portfolio while offering EU LPs a compliant access vehicle.
- Sub-threshold AIFM delegation: Where the fund manager’s AUM is below the AIFMD thresholds (€100m for leveraged funds, €500m for unleveraged funds with lock-ups of five years or more), a sub-threshold AIFM structure may be available in certain member states under lighter-touch national rules.
Tax Considerations in Choosing the Structure
The choice between NPPR and a Luxembourg or Irish parallel vehicle has tax consequences that must be modelled before the structure is committed to.
A Luxembourg SCSp is transparent for Luxembourg tax purposes — meaning the SCSp itself does not pay Luxembourg tax, and the income and gains flow through to the LPs. This is generally efficient for EU institutional LPs that may be exempt from tax in their own jurisdiction. However, the management fee paid to the UK manager by the Luxembourg vehicle may create a Luxembourg PE risk if not structured carefully.
An Irish ICAV is an alternative popular for crypto fund structures seeking EU investor access. When structured as a qualifying investor AIF (QIAIF), it accesses the AIFMD marketing passport through an Irish AIFM and is familiar to European institutional investors.
Conclusion
The carry tax analysis and the AIFMD/NPPR analysis share a structural feature: both need to be completed before the commercial event — the first realisation and the first institutional LP conversation, respectively. Once the event has occurred, the options available to the fund manager are significantly narrowed, and the cost of rectification is higher than the cost of initial advice.
For a crypto fund manager who drafted their carry structure in 2021, has never had it reviewed for UK tax, and is now approaching the first token unlock — or a fund in active LP conversation with European institutional capital — the right moment to begin the analysis is now.
