Private equity tax grab could raise nearly £1bn, study finds

Bringing the tax on profits earned by private equity bosses in line with income tax could raise up to £1bn, a fresh study from a respected think tank has found.

Researchers from the Centre for the Analysis of Taxation’s (CenTax) estimate that taxing carried interest – often referred to as ‘carry’ – at the same rate as most performance – related bonuses would raise roughly £800m for the Exchequer.

Carry is one of the principle ways that private equity fund mangers are remunerated, and is taken from the profits of a fund after investors have received their return.

But unlike most other performance-related bonuses paid in finance, it has hitherto been taxed as a capital gain at 28 per cent, not the the 45 per cent plus national insurance contributions applied to other bonuses.

The findings from the CenTax sudy will be welcome news to Rachel Reeves, who is expected to announce reforms to carry in next week’s Budget after her party promised to close what it branded the “carried interest tax loophole” in its manifesto.

Its authors also modelled for less severe hikes in the event the chancellor decides against enacting the most punitive option available to her, finding that taxing it at the same rate as a dividend would raise an additional £400m.

Andy Summers, an associate professor at the London School of Economics, who helped produce the paper, told City AM: “It’s hard to see how the government could square anything lower than a 39 per cent tax rate, the top rate on dividends, with their previous commitments to tax carried interest like other performance-related rewards.

“Even then, bankers might reasonably ask why they have to pay a 53 per cent effective tax rate on their bonuses, if this is the deal for private equity executives.”

The study of fresh HM Revenue & Customs data also contested that warnings of an exodus of buyout specialists from the UK’s vibrant private equity scene would come manifest in a way that would damage the public purse.

It found that even lifting carry to 45 per cent would only cost the Treasury money if at least two out of every five foreign carry recipients (39 per cent) left as a result of the reform, which the authors said “far exceeded” their plausible worse case scenario.

The private equity industry has been lobbying the government against proceeding with the changes, with one mooted workaround being that dealmakers who put personal capital into their fund could maintain a more favourable rate.

Reeves herself has previously floated the idea, but a separate CenTax paper published alongside its main carry report warned against the move to incentivise ‘co-investment’.

The authors of the paper argued that it would overcomplicate the tax and disproportionately benefit already-wealthy dealmakers, without solving what they called the “inequities” of the carried interest regime.

“A co-investment threshold, if it has any effect, would ensure that only the very wealthiest private equity executives benefit from the tax subsidy while distorting investment choices,” said Arun Advani, an associate professor of economics at the University of Warwick.

“If the Treasury advice is that this regressive and anti-growth choice is the least worst option because it thinks migration among the wealthiest execs would be high, it is important that this is explained transparently, and that the evidence for this is set out clearly.”