Is the UK about to make a massive tax mistake? Private equity sounds the alarm

The landscape of UK’s private equity industry is on the cusp of a seismic shift, as the specter of radical changes to the capital gains tax regime looms large. Prime Minister Sir Keir Starmer’s recent rhetoric, emphasizing the redistribution of burdens onto those with "the broadest shoulders," has reverberated through the corridors of power, instilling a sense of unease among dealmakers.

1. Carried Interest Tax Treatment:
   • In the spotlight is the tax treatment of carried interest, the performance fees that fund managers garner from asset sales. Currently, carried interest is taxed as a capital gain at a favorable 28%, significantly lower than the highest bracket of income tax. The government’s proposed overhaul seeks to close this gap, potentially altering the financial calculus for private equity executives.
   • The Treasury’s one-month consultation, held amidst the languid days of August, has raised eyebrows within the industry. Critics condemn it as a cursory effort, lacking in-depth consideration and signaling the government’s unyielding stance in its pursuit of fiscal changes.
2. "Non-Dom" Status:
   • Of equal concern is the potential revamping of the advantageous "non-dom" status, which enabled affluent foreigners to circumvent taxes on their overseas income. A shift in this policy could further impact the attractiveness of the UK as a hub for private equity operations.
   • The possibility of these tax reforms has prompted speculation among private equity executives regarding the viability of remaining in the UK. Some fear that if the upcoming Budget enforces stringent measures, an exodus of talent may ensue, diminishing London’s prominence as a dealmaking epicenter.
3. Context and Challenges:
   • The geopolitical landscape is fraught with uncertainty, compounded by Brexit and the global competition to entice top earners. Countries like France, Italy, and Germany have already imposed capital gains taxes ranging from 26-34%, potentially luring investment away from the UK.
   • While the number of individuals directly benefiting from the carried interest regime is limited, the ripple effect on job sectors like banking, law, and consulting is substantial. Any adverse alterations to the tax framework could jeopardize the UK’s status as an asset management powerhouse.

In the face of these impending changes, private equity practitioners find themselves at a crossroads. The allure of tax havens abroad beckons, threatening the delicate equilibrium of London’s financial ecosystem. As the industry braces for an uncertain future, the resolve to adapt and navigate these uncharted waters will be paramount. The decisions made in the coming months could redefine the trajectory of private equity in the UK, shaping its competitive edge on the global stage.