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New UK Budget to Hit Private Equity Managers’ Pockets

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July 9, 2015

 

The recent UK election changed the political landscape in the UK and resulted in the Chancellor of Exchequer outlining his second Budget of the year yesterday. The Budget is the first majority Conservative budget since 1996 and it outlined some changes that will have an impact on private equity firms operating in the country and could even push some of them elsewhere.

 

The Budget Changes

 

George Osborne, the Chancellor of Exchequer, laid out his budget plans on Wednesday. The Budget had plenty of changes, with some of them having direct impact on private equity firm operations in the country.

 

The changes will see partners in private equity and other alternative investment funds to have to give a bigger slice of their performance fee to the government in tax. These partners will need to pay full capital gains tax on carried interest.

 

The changes are part of the Chancellors aim to tackle tax avoidance and cut down the government’s deficit. “The changes to the taxation of private equity carried interest bring to an end a basis of taxation agreed with HMRC as long ago as 1987 when the industry was in its infancy,” Alex Henderson, tax partner at PwC, was quoted saying in The Telegraph.

 

The changes will only have impact on fund managers who aren’t classed as company employees. If the person is employee, they will naturally pay the performance fee as part of their income tax.

 

The UK Government expects the changes to bring no extra revenue for the tax year 2015/16, but $407 million in 2016/17.

 

The Current Situation

 

The current situation in the UK means that the rate a person has to pay will vary, depending on the person’s tax planning. The capital gains tax could be under 10%. This is low compared to the headline capital gains tax rates, which are 18% and 28%.

 

The carried interest is naturally important for private equity managers and partners, as it is the share of the profits, which build up over several years before payment.

 

The changes will come into effect on all carried interest arising on or after July 8, depending on when the arrangements were entered into. The quick introduction of the changes doesn’t leave much room for planning for many private equity and other funds.

 

How The Change Was Welcomed?

The industry has already reacted to the news with mixed feelings. Gavin Bullock, partner at Deloitte, told Reuters, “It’s clearly a very relevant change for the asset management industry, particularly those investing into alternatives such as PE (private equity), real estate and hedge funds – it’s a material part of their pay.”

 

Peter Boreham, from Mercer, told The Telegraph, “Despite these changes, we anticipate that such plans will still be more tax-favourable than the bonus plans and long-term incentives used in listed companies.”

 

Although the real impact is to be known much later, some believe it could well mean funds and fund managers relocate elsewhere. Russell Morgan, a partner in the financial services unit EY, told Reuters, the US, with capital gains tax rate of 20%, might well attract some managers and make them leave the UK behind.

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