The UK’s July general election led to a significant change to the way carried interest is awarded and taxed.
Chancellor Rachel Reeves said in the government’s October budget announcement that carried interest will be taxed at 32 percent from April 2025, up from the current rate of 28 percent. From April 2026, carry will be brought within the income tax framework, resulting in an effective rate of around 34 percent.
Though not exactly cause for celebration among UK-based private equity executives, the industry nonetheless breathed a sigh of relief once the government confirmed it would not tax carry at the maximum rate of 45 percent. It was a possibility that many had feared: in July, one senior executive at a London-based PE firm told Private Equity International that becoming too aggressive on carry tax would be a “big mistake”, noting that the country could see an exodus of GPs or individuals to Italy, Portugal or Switzerland.
In its September earnings call, CVC Capital Partners said a carry tax hike could influence some private equity professionals to relocate, noting, however, that it was not a concern internally. “Will it influence where some people want to be based? Probably, actually. Is that a worry for us? No, it’s not,” said chief executive Rob Lucas.
Others showed more optimism, arguing that an exodus was implausible regardless of the outcome. In a September episode of PEI’s Spotlight podcast, Michael Graham, a partner at law firm DLA Piper, said it was highly unlikely that PE professionals would leave the UK en masse as a result of any tax changes. Graham argued that the UK’s carry tax regime is “probably one of, if not the most” complex in the world, noting that a simplified flat tax rate could benefit many.
Most PE professionals shared Graham’s optimism after the budget announcement. “It could have been worse,” said a spokesperson for one London-headquartered mid-market firm. “It strikes the right balance,” added James McCredie, a tax partner law firm Macfarlanes.
The industry has now turned its attention towards the consultation period that will conclude in January. With this, the government aims to iron out key issues – most notably, the minimum co-investment amount and holding period. In an August guest commentary, Rami Cassis, chief executive of Parabellum Investments, argued that GP commitments will prove key to the success of this new regime. Managers should welcome the tax change and respond by investing more of their personal capital into the funds they manage, he added.
“[The tax increase] should be seen as an opportunity for private equity firms to strengthen their portfolios,” Cassis wrote, advocating for GP commitments of at least 10 percent – up from the “shockingly low number” of around 1 percent currently. This would give managers a greater performance incentive, Cassis argued, driving returns.
Now that the worst-case scenario for carry tax has been ruled out, the private equity industry will shift its focus in 2025 towards ensuring the tax hike can provide positive outcomes for all parties.
