City minister pledges to work ‘together’ with private equity as tax hike looms

The City minister pledged to work “together” with the private equity industry today but steered clear of mentioning a looming tax hike which could put the sector on a collision course with the Treasury.

In a speech at the British Private Equity and Venture Capital Association’s (BVCA) annual summit, Tulip Siddiq said private capital would be core to the government’s growth mission but omitted any mention of a contentious tax hike on so-called carried interest – the profits that investment bosses make from the sale of assets.

Labour has just consulted on changes to lift the charge in a move which has unsettled private equity bosses and triggered fears of an exodus of dealmakers from the City to lower tax jurisdictions.

Currently, carried interest is taxed at 28 per cent rather than the higher level of income tax at 45 per cent. The government could equalise the two charges at 45 per cent, a move which is expected to raise around £500m for the Treasury.

The BVCA itself has been lobbying against a blanket rise, warning that larger taxes would put the UK out of step with “key competitor jurisdictions” like the US, France, Germany and Italy. However, the gap has been seen as a “loophole” by many as it allows bosses to rake in profits at a lower tax rate. 

Labour pledged to lift the tax in its election manifesto but Chancellor Rachel Reeves has since said allowances will be made for executives who commit their own money to funds.

Speaking to the BVCA today, Siddiq said that she and the pensions minister, Emma Reynolds, were focused on driving growth in the sector and unlocking institutional capital to flow into private equity and venture capital investors.

“I really believe that it’s only by working together that we will deliver greater returns for private capital investors, scale up high growth innovative UK firms, and we will be able to deliver the change and the growth that our country desperately needs,” she said.

Ministers have been looking to unlock a flood of cash from major institutional investors and pension funds to flow into venture capital investors. In a pension investment review, launched earlier this month, the Treasury and Department for Work and Pension said it was exploring how to divert more pension money into “productive assets”.

Easing the flow of pension capital to flow into the industry has been a key mission of both this government and the last. The near £2 trillion pot of capital stored up in defined contribution pension funds has been seen as underutilised compared to competitor countries.

“We do recognise that UK pension funds could allocate more of their default funds to high growth potential companies,” Siddiq said. “Emma Reynolds and I will work closely with you to unlock that institutional capital through examining options to encourage pension funds to invest in UK assets, promoting growth across the country.”

The Chancellor, Rachel Reeves, has said that unlocking pension capital will be key to financing her growth plans.