According to an analysis by law firm Macfarlanes, a group of 255 top private equity dealmakers in Britain earned £2.7 billion in carried interest between the 2020-2021 tax year, which accounted for about 80% of all carried interest earned by private equity executives. Carried interest refers to the share of profits made on successful deals and is a significant part of remuneration for PE executives. Following this, the UK Labour party plans to implement a £440 million tax increase on the industry if they are elected in the next general election. In light of this, Claire Trachet, CEO of business advisory, Trachet, and M&A expert comments on the UK being at risk of losing significant amounts of private equity investment.
While the Labour party’s announcement to implement a tax raid on the industry comes amidst estimates that the UK is missing out on approximately £600 million per year by taxing carried interest as a capital gain, the decision also presents risks. By making the decision to increase taxes on carried interest, the government could risk alienating dealmakers. This, combined with several macroeconomic challenges that the market continues to face could mean the UK misses out on PE investment and ultimately seeing the UK treasury lose out on revenue.
Other European countries, such as Italy and Spain, are examples of countries that have been successful in attracting well-paid financiers by offering them lower tax rates on carried interest. For example, in 2017, Italy introduced a tax regime that exempts foreign income from Italian tax for individuals living outside the country for at least nine years in exchange for an annual payment of €100,000. Similarly, the US has also had discussions surrounding taxing carried interest as ordinary income, which could generate revenue. However, no government has been successful in passing this kind of measure. Even President Joe Biden, along with previous presidents and prominent figures on Wall Street, has supported the idea of taxing carry, but it has not yet come to fruition.
Claire Trachet (CEO/Founder) comments on the UK’s risk of losing private equity investment:
“While the UK has experienced a wealth of private equity takeovers in recent years, indicating how attractive the country is as an investment opportunity, plans from the government to increase taxes could risk halting the investment from PE firms.
“Losing these dealmakers could be a critical loss for the UK market, which continues to battle rising interest rates and inflation. This also comes at a time when investors have just become less risk-averse, they know that opportunities are presenting themselves and therefore are no longer frozen.
“The M&A sector in the UK appears to be picking up again, which was largely kept afloat by foreign dealmakers so far this year. However, with a stronger pound valuation expected by the end of 2023, this could also result in increased caution from foreign dealmakers who know they will no longer be getting as much of a bargain from companies that were once eagerly looking to exit.
