Carried Interest and Divorce: How the Court Divides Private Equity Rewards

Why Carried Interest Is Unlike Any Other Asset on the Schedule

Carried interest, usually referred to as “carry”, means the share of a fund’s investment profits allocated to the individuals who manage it. It is typically payable only once the fund’s returns exceed a set hurdle rate, and only after the fund has begun to realise its investments. The holder has no entitlement to anything until those conditions are met.

That structure produces a combination the family court finds genuinely difficult to grapple with. The eventual figure can be very large indeed, often larger than every other asset in the case combined. It is also entirely contingent, illiquid for years, and dependent on the performance of investments nobody can value with confidence at the date of the final hearing.

There is a further layer that is frequently missed. The equity house itself usually controls when carry is treated as vested in a particular individual, and depending on how the vesting is framed, the entitlement can fall away if that individual leaves the firm as a “bad” leaver. The judgment in ED v AP [2025] EWFC 399 sets out precisely this structure.

The result is that, following divorce, carried interest cannot sensibly be treated in the same way as other assets such as real estate, a pension fund, a shareholding or a bank account. The court is not dividing an asset. It is deciding how to share a future event.

Is Carried Interest a Bonus, or a Return on Capital?

Neither exclusively. In A v M, Mostyn J held that carried interest is a hybrid resource, carrying the characteristics of both a return on capital investment and an earned bonus. That characterisation is not a technicality. It determines the outcome.

If carry is understood as a return on capital contributed during the marriage, the non-owning spouse’s claim to it is strong, because the capital is viewed by the family court as “marital” in nature, the consequence being that both parties have an equal claim to the asset. If it is understood as reward for work performed after separation, the claim weakens considerably, as it is a well-established principle in family law that there is no sharing claim on income earned following separation.

Because carried interest is both things at the same time, the court divides it by reference to time; the family court is then tasked with working out how much of the fund’s life fell within the marriage.

The Legal Framework: A v M and the Formula for Apportioning Carry

In A v M, Mostyn J apportioned the marital element of carried interest linearly across the life of the fund, using the formula A divided by B equals C. In this formula “A” is the period from the establishment of the fund to the date of trial; “B” is the expected life of the fund and “C” is the marital proportion available for sharing.

Before A v M, the court took a broader discretionary approach, as in B v B [2013] EWHC 1232 (Fam). The attraction of the formula was that it replaced discretion with arithmetic.

Importantly, the formula runs to the date of trial rather than the date of separation. The court took that view because the parties’ economic partnership remained entangled until then, which is often when wealth sits in illiquid structures that neither party can access.

The following illustration uses invented figures and is included only to show how the arithmetic operates.

In A v M itself, the wife was awarded 48.53 per cent of the husband’s carried interest in Fund 1. The percentage was fixed at the date of trial and applied to whatever the fund subsequently paid out.

Why Co-Investment Is Shared More Generously Than Carry

Co-investment is the capital the fund manager puts into the fund alongside the external investors. Because that capital is usually drawn from marital resources rather than earned through post-separation effort, it is generally shared more generously than carried interest.

The difference in A v M was substantial. In the same fund, the wife received 78.19 per cent of the husband’s co-investment and 48.53 per cent of his carried interest. Same marriage, same fund, two very different percentages, for a reason that goes to the source of the value rather than its size.

Co-investment also brings obligations, not just value. Undrawn commitments and capital calls may fall due long after the order is made, and the fund documents may require the holder to fund them on short notice. An order that treats co-investment purely as an asset, and not also as a contingent liability, will not survive contact with the limited partnership agreement.

Why the A v M Formula Is Now Being Questioned

In ED v AP [2025] EWFC 399, HHJ Hess declined to apply the A v M formula and identified two flaws in it. Both point to the same underlying problem: the formula depends on a number nobody can know at the date of the hearing.

1. The Estimate of the Fund’s End Date Is Unreliable

The value of B in the formula is an expected fund life, which is to say a prediction. Funds can run longer than expected and, as A v M itself later demonstrated, they sometimes close much earlier. Because B sits in the denominator, an error in that prediction distorts the entire marital proportion. The formula produces a precise percentage from an imprecise input.

2. Work on a Fund Is Not Spread Evenly Across Its Life

Linear apportionment assumes that the effort generating the carry is distributed evenly from the fund’s establishment to its wind-up. In practice, it rarely is. Deal origination, acquisition and the early value-creation work are often front-loaded, while later years may involve monitoring and exit management. A straight-line calculation can therefore attribute too little, or too much, to the marital period.

Rather than apply the formula, HHJ Hess adopted differing sharing percentages fund by fund, weighting more heavily those funds whose life straddled a greater part of the marriage. In June 2026, the Financial Remedies Journal published a proposed alternative, described by its authors as A v M (Extended), which calculates the marital proportion on actual receipt rather than fixing it at the date of trial.

Harriet’s Experience

Simply fixing a marital percentage of carried interest carries inherent risks as outlined above. Fund end dates are usually speculative and it can be difficult for the party not involved in the fund to understand that there is no guarantee that the fund will end on that date rather than at an earlier or later date. In my experience, the second criticism is the most difficult for a client to understand. Adopting a scenario where it is the husband who owns the interest, he may feel aggrieved if the wife is awarded 30% (in the example above) if the reality is that the difficult part is the exit process which can require intensive work after the marriage has ended. Conversely, the wife may feel hard done to if she is limited to a share of the marital proportion in a fund where all the work has been front loaded and surrounding the fundraising process. The latter years may require simply monitoring the fund.

Wells Sharing: Dividing a Receipt That Cannot Be Valued at Trial

Where a future receipt is too uncertain to value, the court may divide it in specie instead, an approach known as “Wells sharing”. In Versteegh v Versteegh [2018] EWCA Civ 1050, Lewison LJ accepted that such an approach can be necessary to avoid considerable unfairness where contingent assets are large. Both parties then remain exposed to the fund’s performance, for better or worse. The downside, of course, is that such approach does not achieve a clean break for the parties.

An unresolved tension remains in applying Wells sharing alongside the A v M formula, and it is central to the current debate. If the amount of the carried interest is too uncertain to fix at trial, it is difficult to explain why the marital percentage is treated as sufficiently certain to fix at trial. The two positions sit awkwardly together.

A v M in Practice: What Happened When the Fund Changed Shape

The most instructive part of the A v M story is not the formula; it is what happened afterwards. The case returned to court twice, on the construction of the order that the formula had produced.

In A v M (No 2) [2024] EWFC 214, Cohen J was required to construe the original order after part of the fund’s investments were carried into a continuation fund, a structure the order had not anticipated.

In A v M (No 3) [2024] EWFC 299, Fund 1 closed two years earlier than the husband had indicated at trial. The wife’s case was that the husband’s construction of the order forced her to cash out, while he rolled part of his own investment into a continuation fund and retained exposure to future growth.

Continuation funds are considerably more common in 2026 than they were in 2021. An order dealing with carried interest that says nothing about rollovers, early closure, or which party holds the election is incomplete when it is sealed.

Harriet’s Experience

This litigation provides the clearest demonstration on the need for a proper understanding of the fund and the possible outcomes. An order that does not provide for the fund to evolve differently than anticipated at inception simply invites further litigation (and the attendant legal costs.) A v M demonstrates the importance of having advisers who truly understand the possible outcomes for the fund and can provide careful drafting to endeavour to provide for different scenarios.

The April 2026 Tax Changes and What They Mean for Settlements

From 6 April 2026, carried interest is taxed within the income tax framework rather than as a chargeable gain. The individual is treated as carrying on a trade, and the profits of that deemed trade are subject to income tax and Class 4 National Insurance contributions. Where the carried interest is qualifying, a 72.5 per cent multiplier applies to the qualifying profits, producing an effective rate of approximately 34.075 per cent for an additional rate taxpayer. Carried interest that is not qualifying is taxed at an effective rate of approximately 47 per cent.

Whether carry qualifies turns on the average holding period conditions, which apply a weighted average holding period test of 40 months; a minimum co-investment requirement; and a minimum carry holding period, the relevant provisions sit in the Finance Bill 2025-26.

The gap between roughly 34 per cent and roughly 47 per cent is not a detail on a large receipt. Whether a particular fund’s carry qualifies is therefore a question the parties need answered before, not after, a settlement is agreed.

The consequence for a financial settlement is straightforward but frequently overlooked. A percentage of a gross receipt and a percentage of a post-tax receipt are now materially different figures. An order that does not specify which it means invites a second round of litigation at the point of distribution, which is precisely when relations between the parties are least likely to be constructive.

Payments on account also affect the cash flow. Carry received in one tax year can generate a liability payable before the next distribution arrives, which matters where an order requires a payment to be made out of a receipt rather than out of general resources.

This is general information and not tax advice. Carried interest taxation is a specialist area and settlements involving it should be structured with input from a tax adviser as well as a family lawyer.

Can Carried Interest Be Moved Offshore to Defeat an Order?

It is harder than it was, although the position is not fully settled. The new regime locates the deemed trade by reference to UK workdays, which means UK tax applies to carried interest relating to services performed in the UK. Non-UK residents are brought within the charge, but only where they spend at least 60 workdays in the UK in the relevant tax year, and time spent in the UK before 30 October 2024 is effectively excluded from the calculation.

The legislation does not define what amounts to a permanent establishment for these purposes, and HMRC guidance is awaited. That is worth knowing before anyone builds an argument, on either side, on the assumption that the point is clear.

The greater practical risk lies inside the fund rather than across a border. A rollover into a continuation fund, an early closure, a restructuring of the carry arrangements, or an election available to one party and not the other can all change the substance of what an order was intended to divide, without anyone leaving the jurisdiction.

The protection against that risk is drafting, continuing disclosure and security, agreed at the time of the order rather than argued about years later.

What an Order Dealing With Carried Interest Should Address

Eight points that warrant attention before an order is sealed:

1. How A and B are defined, including whether B ends at the expected life of the fund or at actual receipt.
2. Whether the marital percentage is fixed at the date of trial or recalculated on receipt.
3. How continuation funds and rollovers are treated, and whether both parties have the same election.
4. What happens if the fund closes earlier or later than the date assumed at the hearing.
5. Whether the share is of gross or post-tax receipts, and which party bears the tax.
6. Continuing disclosure obligations, what they cover, and how long they last.
7. What happens if the holder leaves the firm, including how bad leaver provisions and unvested carry are treated.
8. What security exists for the paying party’s obligation while payment remains outstanding.

International and Cross-Border Carried Interest

Private equity structures are rarely confined to one jurisdiction. Funds are frequently established offshore, the individual may work across several countries, and the carry may be held through vehicles governed by foreign law. Each of those features raises questions about disclosure, valuation and enforcement that will need to be factored into the equation.

Where one or both parties are foreign nationals, or where there are competing proceedings abroad, the position becomes more complex again. The English court’s approach to sharing may differ substantially from the approach taken in the jurisdiction where the fund sits, and the practical enforceability of an order against an offshore structure needs to be considered before it is agreed rather than after.

Harriet’s Experience

In many private equity structures it is very common for there to be entities in several jurisdictions but the court will look through the structure to determine the economic reality. Difficulties most often arise in anticipating and calculating what overseas taxes will be applicable.

If You Hold the Carried Interest Rather Than the Claim

The uncertainty in the current approach cuts both ways. A percentage fixed at the date of trial can overstate the marital element just as easily as it can understate it, particularly where a fund runs materially longer than the life assumed at the final hearing. A holder who accepts a formula without addressing what happens if the assumptions prove wrong may be worse off than one who negotiated a clear mechanism.

The answer is the same for both parties. The order needs to describe what happens in the scenarios that have not happened yet. Failing to address this is likely to lead to further proceedings (and the resulting costs).