How is carried interest treated on divorce?

Carried interest (“carry”) can be one of the most complex assets to deal with on divorce. For those working in private equity, venture capital, or fund management, it may represent a significant part of their overall wealth. For the other spouse, it may appear to be a valuable matrimonial resource which should be shared. For the fund spouse, it may be argued to be speculative, illiquid, contingent, deferred remuneration, or a reward for future work.

The family court’s task is to look beyond the label and consider what the carried interest actually represents.

What is carried interest?

Carry is a performance-related entitlement commonly received by private equity fund managers. It gives the fund manager a share of the profits of a fund once investors have received back their capital and a minimum return.

It is not the same as salary, bonus, or ordinary share ownership. Its value may depend on fund performance over several years and may be subject to vesting provisions, hurdle rates, clawback, transfer restrictions, and tax consequences. In some cases, it may never pay out at all.

This makes it difficult to value in divorce proceedings as it is often uncertain and illiquid.

Is carried interest income or capital?

One of the key difficulties is classification. Carry may be taxed as capital gains, but that does not mean the family court will necessarily treat it as capital for financial remedy purposes. Equally, it is not always simply income.

In A v M [2021] EWFC 89, Mostyn J described carried interest as a “hybrid” resource, neither exclusively a return on capital nor an earned bonus. The court therefore had to consider how much of it had been generated during the marriage and how much related to post-separation endeavour.

That distinction matters because matrimonial assets are usually subject to the sharing principle, whereas assets accrued post-separation are not, and will only usually be called upon when needs dictate. Carry often blurs that boundary. A fund may have been established during the marriage, with substantial work carried out during the marriage, but the actual payment may not be received until years later.

Why timing matters

Timing is often central. The court will consider when the fund was established, when the carry was awarded, when it vested, when the parties separated, and when the fund is expected to realise value.

The key question is, “To what extent was this resource generated during the marriage?”

A carried interest payment received years after separation may still reflect value created during the marriage. Conversely, an interest in a later fund may depend substantially on post-separation work and may therefore be treated differently.

The A v M methodology

In A v M, the court adopted a formulaic approach to identify the marital element of the carry.

Rather than treating the carry as either wholly matrimonial or wholly non-matrimonial, the court apportioned it by reference to the life of the relevant fund. The marital element was calculated by looking at the proportion of the fund’s life which had elapsed by the date of trial. That proportion was treated as matrimonial and was then shared.

This methodology is important because it recognises that carried interest may be partly generated during the marriage and partly generated by post-separation endeavour. It also provides a more structured approach than simply making a broad discretionary assessment.

However, it should not be assumed that the same calculation will apply in every case. The court retains a broad discretion and will look carefully at the fund structure, timing, vesting, liquidity, valuation evidence, and the parties’ overall financial circumstances.

Valuation and sharing

Carry can be very difficult to value. There may be no market for it, it may not be transferable, and the eventual payment may depend on future fund performance and market conditions. Expert evidence may be required, but even then, the valuation may be uncertain.

For that reason, the court may consider deferred sharing, sometimes referred to as a “Wells sharing” approach. This means that the non-owning spouse receives a defined share if and when the asset is realised, rather than receiving an immediate lump sum based on a contested valuation.

This can be useful where the carry is potentially valuable but uncertain. It avoids requiring the fund spouse to pay money before receiving it, while also protecting the other spouse from being bought out at an undervalue.

However, deferred sharing can leave the parties financially connected for many years and requires careful drafting. The order should define what is being shared, whether the share is calculated before or after tax, when payment is triggered, what disclosure must be provided, and what happens if the interest is rolled over or restructured.

Where there are sufficient other assets, an immediate offset may still be preferable, though not without risk. One spouse may keep the carry while the other receives more liquid capital. The appropriate structure will depend on the facts.

Disclosure is critical

Full and frank disclosure is essential. A spouse with private equity interests should expect to provide detailed information about their fund interests, including documents needed to understand the nature, value, timing, and restrictions attached to any potential receipts.

Without proper disclosure, it may be impossible to assess whether the carry is genuinely speculative or likely to produce significant future value.

The competing arguments

The non-fund spouse may argue that carried interest should be shared because it was generated during the marriage. They may say that the fund spouse’s career, reputation, and ability to participate in the fund were built up during the marital partnership, often with the other spouse making domestic, childcare, or career sacrifices.

The fund spouse may argue that the carried interest is speculative, illiquid, and dependent on post-separation work. They may say that any payment will only arise if the fund performs well and that further effort and risk are required after the marriage has ended.

The outcome is fact-specific. The court will look carefully at the fund structure, timing, vesting, liquidity, valuation evidence, and the parties’ wider financial circumstances.

Carried interest is not treated automatically as income, capital, bonus, or future earnings. The court will look at substance over label.

The central question is usually whether the carry was generated during the marriage, whether it can be valued reliably, and whether fairness requires immediate sharing, deferred sharing, offsetting, or exclusion of some element as post-separation wealth.

These cases require careful disclosure, expert valuation input, strategic advice, and precise drafting.

If you are going through a divorce involving carried interest, private equity interests, or complex remuneration structures, please contact Family partner Grainne Fahy or senior associate Yasmin Khan-Gunns.