Proactive Investors – Private equity managers are bracing themselves for major changes in the way they are taxed following consultations with the government ahead of the Budget.
Private equity bosses generally get the bulk of their income through performance or incentive fees, typically around 20% of the value of a fund if targets are hit and paid to a general partner, who distributes it among other limited partners.
Known as carried interest, these fees currently are taxed as capital gains in the UK rather than income, meaning the top rate is 28% and in line with countries such as France, Germany and Italy.
Chancellor Reeves though is said to be considering a change to that and to bring carried interest back in line with income tax where the top rate currently is 45% with national insurance on top.
Discussions between the private equity firms and the government took place in August over a month-long consultation period, the FT reported, but with little to indicate afterwards that the rumoured changes won’t happen.
A statement from the Treasury in the FT report said: “We are committed to reforming the tax treatment of carried interest, delivering fairness in this area of the tax system while recognising the vital role that our world-leading asset management industry plays in channelling investment across the UK.
“We launched a call for evidence so that a wide range of stakeholders can provide their views as part of this.”
Managers responded by indicating big changes in tax might spark some to leave the capital, though anther added it might have little impact and even at 45% tax on carried interest “It would be hard to beat the convenience of London”.
