Private equity warns UK capital gains tax overhaul could be ‘tipping point’

Private equity executives have warned radical action to overhaul the UK’s capital gains tax regime could prove pivotal in sparking an exodus of dealmakers from Britain.

Prime Minister Sir Keir Starmer’s speech on Tuesday, where he cautioned that those with “the broadest shoulders should bear the heavier burden”, sent jitters through the UK private equity industry.

The newly elected Labour government had already put the industry on notice with a consultation that closed on Friday about plans to change the tax treatment of carried interest, the performance fees that fund managers receive from asset sales.

Many private equity executives are also exposed to changes to the favourable “non-dom” status that allowed wealthy foreigners to avoid paying tax on their overseas income. 

One partner at a top-20 global private equity firm said: “If the government does something really strong [in the Budget next month] then that will be the tipping point where people accelerate plans to leave.”

A second executive at a leading private equity group added: “If things become significantly unattractive relative to other countries and you’re not from the UK, why would you stay?” 

Private equity executives have long benefited from an arrangement that means carried interest is taxed as a capital gain at a rate of 28 per cent, rather than the highest bracket of income tax, which is 45 per cent plus national insurance.

The industry has for months been preparing for Labour to tighten the regime. 

However, insiders viewed the Treasury’s one-month-long consultation as an aggressive move that signalled the government was not prepared to give detailed consideration to its proposals.

The timing of the consultation, which took place during August when many people were on holiday, suggested the government was “paying lip service” to the industry, one leading tax lawyer said. 

“This is a matter of principle for the government and it will primarily be a political decision,” he said.

The Treasury said: “Following the spending audit, the chancellor has been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy and address the £22bn hole in the public finances left by the last government.”

“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.”

In March, one of London’s top private equity lawyers warned that Labour’s plans to raise the tax on carried interest could be more damaging to the capital’s status as a dealmaking centre than Brexit. 

The UK is the largest hub for private capital investment outside the US, with UK-managed funds accounting for just over half of the total private equity and venture capital raised in Europe in 2023, according to the British Private Equity and Venture Capital Association. 

While relatively few individuals directly benefit from the carried interest regime — around 3,000 people in the UK — many more jobs in banking, law and consulting depend on the private equity industry.

The industry has warned that aggressive fiscal tightening could harm Britain’s position as an asset management centre at a time when other jurisdictions are competing to lure top earners. France, Italy and Germany tax carried interest at 26-34 per cent. 

Many of the largest private equity firms in the UK are the European outposts of US operators, meaning their staff are often highly mobile with limited ties to Britain. KKR, Blackstone and Apollo Global Management all have their main European base in London.

“The American groups have got the loudest voice here,” said the first private equity partner. “Many of the people who are based in their European headquarters in London — French, German or Italian — have no loyalty to the UK at all” and some of them had already left since Brexit. 

Victoria Price, head of private capital at consultants Alvarez & Marsal, said six private capital professionals of her 80 individual clients were moving abroad because of expected tax changes.

Chancellor Rachel Reeves has previously suggested buyout executives who invest in their funds alongside their investors would continue to enjoy favourable treatment. 

Lobbyists have sought to ensure that borrowed money counts as so-called “skin in the game”. They have also warned the government not to adopt a retroactive approach to taxation and to avoid adopting complex new rules.

Several private equity executives said they expected an increase to capital gains tax of at least five percentage points, although they had not completely ruled out a bigger move to align capital gains more closely with income tax.

“No one will make different life decisions if the tax rate goes up by a couple of per cent,” said a third executive. “I hope and trust that the worries about this ceasing to be viewed in a commercial way . . . are not justified.”

Some executives at private equity firms in London expressed scepticism about a mass movement out of the UK regardless of changes to the tax regime. One partner at an international firm said, even if carried interest were taxed at 45 per cent, “it would be hard to beat the convenience of London”.

“Not much is going to change, no matter what,” they said.

Additional reporting by Jim Pickard in London