The UK PE Industry heaves a sigh of relief after hearing the Chancellor’s Budget Speech

The Chancellor’s Budget speech on March 3^rd was preceded by months of speculation, driven by a report published by the Office of Tax Simplification back in November last year, that the rate of capital gains tax (CGT) in the UK might well be increased to come into line with income tax, i.e., 45% for additional rate tax payers in the UK.

As we said in our February newsletter, “It looks like the taxation of carried interest may be under scrutiny again.  In the US, the Democrats have lodged a bill to tax carried interest gains as ordinary income.  With the UK’s Budget only days away, there is some concern here, too….”.

The concern in the UK was not just about the rate of CGT rising.  There was also concern that, even if there was no or limited changes to CGT rates, the scope of the gains which are defined as capital rather than income might be revisited.

Carried interest gains are currently taxed as capital gains in the UK, although at a special rate of 28%.  Whilst this rate is quite a bit higher than the standard CGT rate for higher income earners (20%), it is still far lower than the highest rate of income tax in the UK (currently 45% and 47% if one includes the 2% employee’s National Insurance charge).

Well, we know now that CGT did not get a mention in the Budget and nor did the taxation of carried interest.

But even after the Budget speech, there was still some concern about the taxation of carried interest plans and CGT rates because it was announced that there was due to be a series of consultations launched on various aspects of taxation by Her Majesty’s Treasury later in the month (i.e. in March).

These consultations have now been published by the Treasury (on 23 March) and are the subject of a separate article in this month’s newsletter entitled “the new Government tax review”.  But the most important message coming from that announcement (as far as the taxation of carry is concerned) is that there is no plan in 2021 to review the structure of CGT.  So, we can wipe our brow and heave a sigh of relief, for now.

Giving carried interest this “guaranteed” capital gains tax treatment makes it very attractive for high calibre private equity and venture capital talent to transact their business from the UK.  The industry in the UK is currently in boom time, with many new funds being raised and new entrants coming into the market from overseas, in particular from the United States and the Middle East.  It would seem non-sensical to make the UK a less attractive place for this talent, potentially driving PE firms and their teams away from the UK.

Having said all that, if the United States does change its position on the taxation of carried interest over there, we have no doubt that this will cause the UK Treasury to take another look at it over here.  Time will tell, but for now the PE and VC industry in the UK can rest a bit easier and hope that Biden’s Democrats do no not get their way.

For further information contact Nigel Mills.

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