Private equity unscathed in UK budget

Chancellor Phillip Hammond remained tight lipped on private equity, but pointed to some small benefits for the industry.

UK private equity portfolio companies will benefit from a reduction in corporation tax, but chancellor Phillip Hammond was otherwise silent on private equity in Wednesday’s Spring budget.

Hammond reiterated the government’s commitment to reducing corporation tax to 19 percent in April 2017, and then 17 percent in April 2020, which will lower the tax bill for UK portfolio companies.

Addressing parliament, Hammond unveiled a new fund designed to mobilize private investment in UK infrastructure; he has set aside £200 million [€230.6 million / $242.52 million] for local projects to leverage private sector investment in full-fiber broadband networks.

This is part of the £500 billion National Infrastructure and Construction Pipeline launched last November. Around 60 percent of funding for the project will be sourced from the private sector.

The private equity industry in the UK has taken a hammering in the past couple of years, with changes to carried interest being introduced last year, and the industry being exempt from a reduction in capital gains tax in the 2016 budget.

Private equity firms will remain excluded from the 8 percentage point reduction in capital gains tax introduced in the Spring 2016 budget, and carried interest will remain taxed at the original rate of 28 percent. As of April last year, the Treasury began taxing carried interest wholly as income if deals last fewer than three years, and partly if groups withdraw from them within 40 months. There was no change to this rule announced in the budget.

The chancellor was also silent on non-doms, who will be hit at the start of the 2017-18 tax year following a revision to the rule passed in the last budget which is effective on April 6. This will hit US citizens living and working in the UK; the US is the only developed country in the world that taxes its citizens on worldwide income and gains, no matter where they reside. Under the new UK rules, they will now also face taxation on the same income in the UK.

“Previously, many US PE professionals based in the UK were not subject to UK tax on their worldwide income, so the interaction of the two tax regimes was much less relevant,” Matthew Saronson, tax partner at Debevoise said.

“The changes in the UK to the non-dom rules and the sourcing of carried interest and other fund-related returns result in a huge change for US citizens residing in the UK.”