City groups are mounting a final call for the Chancellor to temper a tax raid on private equity fund managers amid fears of an exodus of dealmakers from London.
Rachel Reeves’s Treasury has been consulting on plans to lift the levy on carried interest, the personal profits that fund managers make on the sale of assets, but it is unclear how far the rate will be hiked.
A consultation on the plans closes today.
Under the current regime, private equity chiefs pay a rate of 28 per cent on their own profits rather than the higher level of income tax.
The Labour party said in its manifesto that it plans to lift the rate.
However, fears are growing in the City that such a move could push private equity dealmakers to overseas jurisdictions where the rate is lower.
“To support its economic growth mission, the government must ensure that the UK’s system of tax incentivises international investment into the UK, including by the private equity industry,” Miles Celic, boss of the industry group The CityUK, told City A.M.
“The UK’s tax treatment of carried interest needs to take account of the international context and particularly the global competition for investment, otherwise we risk losing out to other major financial centres, particularly the United States.”
Any reform of carried interest should benefit “both the exchequer and the industry” and recognise the “important commercial role which carried interest structures play in aligning investor and manager interests,” he added.
The rate of tax on private equity chiefs has proved a politically contentious topic across Western economies.
Left-wing political parties across Europe and the US have described the lower charge as unfair “loophole” which benefits wealthy financiers and dents overall tax revenue. Democrats in the US have similarly taken aim at the lower rate.
According to Labour’s own analysis, lifting the charge in the UK could bring in around £500m to the Treasury’s coffers. The Treasury has said it is “committed to deliver the government’s manifesto commitment to reform carried interest and ensure fairness in this area of the tax system.”
However, industry groups argue that the lower charge helps fuel investment into private companies and that any change will simply push dealmakers into lower tax jurisdictions.
In a survey of the industry earlier this year, Investec found that around a third of dealmakers would move to foreign countries if the rate was lifted. Some five per cent said they would consider a career change.
“It is critical to the Government’s mission to increase growth that the UK remains an attractive and internationally competitive place for private capital firms to locate their teams and invest,” Michael Moore, boss of the British Private Equity and Venture Capital Association, told City A.M.
“Making investments to grow companies involves taking risk, and this is reflected in the proportion of private capital funds which achieve sufficient returns to pay carry. These are long-term partnerships with funds typically lasting for ten years or more, and investors demand that returns reach high thresholds before any carry is paid.”
Jonathan Blake, head of international private funds strategy, at law firm Herbert Smiths Freehills, who helped design the current regime in the 80s, said the U.K. “isn’t the only country that taxes carried interest at lower rates than income tax”, with the US, France, Germany, Italy and Spain all following a similar strategy.
“The UK is second only to the USA as a private equity hub which brings large benefits to the economy,” he told City A.M. “And a high proportion of PE executives and carried interest holders are from other countries and therefore more mobile than average.”