The UK Chancellor of the Exchequer Alistair Darling has said in his pre-budget report he will increase the tax private equity executives pay on carried interest from 10 percent to 18 percent.
The Chancellor will scrap “taper relief”, which allows executives to pay 10 percent tax and he will instead introduce an 18 percent flat rate of tax in April 2008 on all capital gains in the UK. Investments qualified for taper relief after two years.
The tax relief became a focus for critics of the industry after Nicholas Ferguson, chairman of UK fund of funds SVG Capital, said the regulations allowed highly paid private equity executives to pay “less tax than a cleaner.”
The former Chancellor and Prime Minister Gordon Brown introduced taper relief in his first budget in 1997.
Michael Trask, tax partner at SJ Berwin, said the measures left the tax in the “UK on the same rate as Spain on 18 percent without the weather.” The UK’s chief European competitors Germany and France both have higher rates of tax on capital gains at 23.5 percent and 27 percent respectively, although if buyout firms meet certain strict criteria they can pay no tax in Switzerland on capital gains.
“Will this move drive people abroad, my instinct is not. Zurich and Geneva are the big unknowns, but in my bones I believe people will not relocate there,” said Trask.
Simon Walker, chief executive designate of trade body The British Private Equity & Venture Capital Association, said: “We regret the rise in the effective rate our investors will pay, but hope the industry will now be recognised for the contribution it makes to pension funds and the wider economy.”
Other tax experts greeted the move with disdain. Richard Collier-Keywood, UK head of tax at accountants PwC, said: “It is disappointing that the Chancellor has increased the rate of tax on capital gains for business assets from 10 percent to 18 percent. Whilst 18 percent is a competitive rate, there is a danger that this will drive some business overseas.”
Bernard Sweet, director of corporate tax at advisory firm Chiltern, said: “This will strike far beyond private equity. Many smaller companies, their staff and investors will suffer as this relief is withdrawn. This could backfire on the Government – it is a blow to hard-working entrepreneurs.”
The government has also moved to tax non-domiciled residents, which will apply to some private equity executives. “From April 2008 resident non-domiciles who have been in the UK for longer than seven of the part ten years will only be able to access remittance on tax after an annual charge of £30000,” the Chancellor said in the pre-budget report document.
Those who use this relief will no longer be entitled to income tax personal allowances and the rules will be amended to stop companies sidestepping tax where it is due on foreign income and gains.
Meanwhile he welcomed “the private equity industry’s resolve to become more transparent and the commissioning of Sir David Walker to develop a voluntary code to promote high standards of disclosure and valuation”. Hopefully this will set in place an effective monitoring framework with sufficient independence to command acceptance, he said.