New ‘income based’ carried interest rules are set out in the Finance (No. 2) Bill 2016. To the extent that carried interest is ‘income based’, it will be automatically charged to income tax. The average investment holding period of a fund determines to what extent carried interest is income based. There are a number of key changes in the Bill from the draft legislation published last December. These include a reduction in the average investment holding period required to escape the rules, from four years to 40 months, and a significant expansion of the rules on follow-on investments and sell-downs. Fund managers will need to monitor fund investments on an ongoing basis.