As the private capital industry looks ahead to 2026, the UK and EU tax landscape is set to present both challenges and opportunities. Recent developments and ongoing policy initiatives will have a direct impact on deal structuring, fundraising, and operational strategies for private capital sponsors. Below is a summary of the most significant UK and EU tax themes that should be on the radar for the year ahead.
Tax as a Deal Dynamic
Tax policy continues to be a key driver in private capital transactions, with geopolitical developments shaping the market environment. In 2026, the possibility of US “retaliatory” tax measures—particularly in relation to digital services taxes—will remain a significant consideration. Tariffs are also expected to continue influencing cross-border investments and portfolio company operations.
European portfolios will require close monitoring as the EU reacts to these global tax shifts. The abandonment of certain EU tax proposals in 2025, such as ATAD III (substance) and DEBRA (debt bias), has removed some potentially-adverse obstacles for the industry, but the potential for new initiatives remains. Agility and an ability to react in real-time will be essential for sponsors navigating this evolving environment.
Tax-Assisted Routes to Exit in the UK
Efforts to revitalise IPO markets across Europe will continue in 2026, with tax incentives playing an increasingly prominent role. In the UK, the introduction of a time-limited SDRT (stamp duty reserve tax) exemption for new listings on the London Stock Exchange is a notable development. Its effectiveness will be closely watched as a possible blueprint for future incentives.
The new PISCES platform for secondary trading in private companies, and its interaction with tax-advantaged incentive plans such as EMI and CSOP, is expected to remain a policy focus. Additionally, the UK fund secondaries and continuation fund industry will welcome further progress in the modernisation of stamp taxes towards the scheduled introduction of the digitised Securities Transfer Charge in 2027.
Ongoing Evolution of UK Fund Management Taxation
The UK’s approach to carried interest taxation is changing, with a new tax regime and increased tax rate (approximately 34.1% from April 2026, subject to conditions) prompting sponsors to reassess their team incentivisation strategies. In a competitive international environment—where jurisdictions like Luxembourg are offering favourable regimes—private capital firms’ talent retention and compensation strategies will need to be kept under review in 2026. Firms will also need to consider the tax implications of a more mobile workforce, including the risk of unexpectedly creating a taxable permanent establishment.
International Tax Reform
2026 is poised to be a pivotal year for international tax reform, with the UN’s Framework Convention on International Tax Cooperation under negotiation. Proposals for unitary taxation of multinationals and the introduction of a “significant economic presence” nexus for cross-border services could fundamentally alter the current tax landscape. These changes, if implemented, would represent a significant shift from established OECD norms and bilateral tax treaties. After a difficult 2025, the recent announcement of the side-by-side agreement on Pillar 2 to assuage US concerns, as well as additional simplification measures to try to stem the ballooning compliance cost, may reinforce the OECD’s supremacy on international tax issues, at least so far as the UK and the EU are concerned.
Private capital firms will want to monitor these developments closely. Any changes could bring both challenges and opportunities for structuring investments and managing tax risk.
AI as Business-as-Usual for Tax
AI is becoming an integral part of tax compliance and administration. In 2026, further developments could see the expansion of AI-powered tax information exchange, the introduction of tax authority AI charters and bills of rights, and new legislation defining AI’s role in tax administration. Tax disputes involving AI and ongoing discussions about taxpayer safeguards will likely also remain prominent.
Private capital will be at the forefront of these changes, both as investors in AI and as beneficiaries of the efficiencies and competitive advantages it offers. Collaborating with AI-enabled advisers will be crucial for navigating the evolving tax environment.
Key Takeaways
2026 will bring significant tax developments for private equity firms operating in the UK and EU. Staying informed about tax-driven deal dynamics, leveraging new exit incentives, adapting to changes in fund management taxation, monitoring international reforms, and embracing AI in tax functions will be essential. Proactive engagement with advisers and policymakers will help sponsors manage risk and capture opportunities in an increasingly complex landscape.
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