Buyout barons hit with a tax clampdown on carried interest

Michael Bow
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UK PRIVATE equity dealmakers will be forced to pay more tax on performance fees after plans were unveiled to enforce higher capital gains charges on their income.

So-called carried interest – the share of profits private equity managers take from a fund – is currently taxed at capital gains tax rates of 28 per cent but many managers have been able to reduce this through careful tax planning.

The Treasury yesterday said it would close the “tax loophole” to make managers pay the correct rate.

“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,” Mercer principal Peter Boreham said.

The change is forecast to generate £265m in the next tax year, £375m in 2017-18, £390m in 2018-19, £390m the following year and £375m in 2020-21, according to Treasury estimates.

“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,” PwC tax partner Alex Henderson added.

The rules impact all carried interest generated from 8 July onwards.

They form part a package of measures which include additional resources for HMRC.