Private equity will leave London if the government doesn’t listen
Uncertainty over government plans to change the taxation of carried interest is driving privat equity away from London, says Edwin Richards
Last week, some of the world’s biggest private equity firms urged the UK government to dilute proposed changes to the treatment of carried interest. But plenty are left wondering what this means in practice and whether the impact will be so significant.
Carried interest is the means by which private equity (PE) managers are rewarded for the performance of the funds they manage. Historically it has been treated as a capital gain rather than income because the PE manager has invested cash in the fund being managed to earn the right to carried interest. The highest marginal tax rate for a carried interest gain rose from 28 per cent to 32 per cent from 6 April 2025. The basic rate band is going up from 18 per cent to the same rate of 32 per cent. One can largely ignore Business Asset Disposal Relief (a rate of 10 per cent) because most PE managers will have used this all up long ago. This seems to be a reasonable and simple compromise between recognising the risky nature of such investment and paying what some see as an unfairly low rate of tax. However, currently the key question is whether carried interest is income rather than a capital gain?
A highly complex new tax regime
In Rachel Reeves’s budget last autumn, she announced that from 6 April 2026, a new highly complex carried interest regime will apply, treating carried interest as trading profits subject to income tax. This would put the marginal rate payable up to 47 per cent (including National Insurance). But if the average investment holding period for a fund is more than 40 months (with tapering from 36 months) this income tax rate can be reduced to a little over 34 per cent. The rules are not clear as the legislation has yet to be published.
It has been argued that the PE managers have very little capital at risk, but the approach of treating it as income disincentivises such investment. Other jurisdictions in Europe require a certain minimum level of investment for the carry to be treated as an investment. This seems a more nuanced approach if, as happens elsewhere the capital regime remains but, in the UK, it is being considered on top of the other measures.
The ultimate test is: will the government’s approach raise more revenue? British PE managers may stay as they have other ties that bind them to the UK, but will foreign, especially US citizens, stay or indeed come here in the first place?
On the one hand the government seems to be saying to the FCA and other regulators that they must cut red tape to make the UK a business-friendly environment, and on the other through the tax system it seems to be driving away business particularly when it comes to foreign individuals living and working here. The carry tax changes come, of course, on top of the non-dom changes, which after a time bring worldwide income into the UK tax net and potentially worldwide assets under inheritance tax.
Irrespective of whether an individual becomes resident in the UK, the government is also suggesting that carry will be subject to income tax “to the extent that it relates to services performed in the UK”. Pop over the Atlantic or the Channel, work for a few days on a deal from the UK and suddenly your carry becomes subject to UK income tax even if you have left the country when the realisation of the investment happens. It is not clear whether double tax treaties would enable the foreign investor to escape, but this very lack of clarity is a problem.
The word on the PE street suggests that the uncertainty for the tax position of PE managers is resulting in many now not travelling to the UK for fear of what might happen.
HM Treasury says it places “a premium on certainty and stability of outcomes, as well as recognising the role tax can play in boosting growth”. Need more be said?
Edwin Richards is a corporate partner at law firm JMW Solicitors in London