(Bloomberg) -- Private equity managers buying and selling companies in the UK will have to pay 32% tax on their share of profits beginning in April, Chancellor of the Exchequer Rachel Reeves said, issuing a tax rise on the buyout industry that was less steep than some had feared.
The new tax rate on carried interest, up from a 28% that dealmakers currently pay on earnings from asset sales, was welcomed by the industry’s main lobbying group. It also compares favorably to the 45% top rate of income tax.
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The reform “recognizes that a tax treatment which reflects the long term, risk-based nature of private capital investments is necessary to ensure that this important UK sector can continue to flourish,” Michael Moore, chief executive of the British Private Equity and Venture Capital Association, said in a statement. “Our industry will work with the government as it consults on implementing these changes.”
Carried interest is traditionally the largest part of a buyout executive’s compensation, and has long been controversial for its comparatively low tax rate. Private equity firms typically charge their investors a regular management fee worth a few percent of a fund’s assets, and get to keep a chunk of the profits from asset sales — known as carried interest.
The UK’s move comes after Reeves spent months considering ways to reform the tax regime for carried interest. The deliberations had sparked fear among industry participants, with General Atlantic writing to the Treasury to warn that some of the firm’s dealmakers in London could leave if plans for higher taxes on carried interest were to go ahead.
Labour reviewed its original plans for closing the loophole after Treasury analysis showed some options would end up costing the exchequer money, Bloomberg News has reported. The changes are now expected to raise a total of £300 million ($390 million) by April 2030, the budget documents showed.
There will be more changes to the carried interest regime from April 2026, to make it “simpler, fairer and better targeted,” Reeves said in her first-ever budget speech on Wednesday, which focused on raising taxes to repair public finances.
Carry will no longer be taxed as capital gains and become part of the income tax system but “with bespoke rules to reflect its unique characteristics,” according to the budget documents.
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