Labour's Tax Pledge Sparks Concern: Capital Gains Tax rises on Carried Interest for UK Private Equity
In the 2022 tax year, 3,000 UK private equity dealmakers reaped £5 billion in carried interest, showcasing the significant sums involved in the ongoing debate around how they should be taxed. This matter highlights the substantial gains enjoyed by the private equity sector during a particularly prosperous year, fuelled in part by robust stock markets.
According to the report, drawing from data provided by the UK tax authority for the 2021-22 fiscal year, these taxpayers typically belong to the bracket who pay capital gains tax on their “earnings” and enjoy a notable degree of mobility. In comparison, the previous tax year saw a group of 2,550 UK taxpayers in dealmaking circles declare £3.4 billion.
Carried interest, which represents the portion of profits accruing to private equity investors from successful deals, has increasingly attracted attention in the UK following Labour's commitment to raise the tax rate on these sums from their current capital gains tax rate of 28% to income tax rates of 45%. This pledge by Labour, slated for implementation should they, as expected, secure victory in the upcoming general election, has stirred concerns among the wider business sector, who fear potential ramifications should dealmakers and their supporting professionals, such as lawyers and bankers, opt to relocate to other jurisdictions.
Traditionally treated as capital gains, carried interest is subject to tax rates ranging between 26% and 34% in countries like France, Italy, and Germany. Labour's projections estimate that aligning the tax rate with the top income bracket would yield approximately £400 million for the Treasury, though experts like tax lawyer Dan Neidle suggest that the current tax treatment of carried interest may be depriving the UK tax authority of around £600 million annually.
Officials within the UK Treasury, basing their assessments on data provided by Conservative advisors, had warned of potential fiscal repercussions should taxes be raised, with estimates suggesting a potential loss of up to £3.3 billion by 2029, fuelled by the prospect of affluent individuals relocating outside the country's borders. Pressure from within the Labour party had led to calls for shadow chancellor Rachel Reeves to reconsider the proposed tax rate, potentially bringing it more in line with the rates observed in other European nations, with the aim of averting such departures. However, shadow business secretary Jonathan Reynolds has re-affirmed Labour's commitment to addressing this tax loophole, though signalling a willingness to collaborate with the affected sector on the implementation of any changes.
Labour Proposes Tax Increase for Non-Domiciled Residents
Labour's Shadow Chancellor Rachel Reeves has unveiled a strategy to target wealthy non-domiciled residents, aiming to generate £2.6 billion annually throughout the next parliamentary term by eliminating tax loopholes. The proposed measures include closing a loophole allowing non-doms until April of the following year to transfer overseas funds into a trust exempt from Inheritance Tax (IHT), anticipated to yield £430 million annually. Additionally, Labour intends to abolish a provision granting non-doms a 50% tax discount on overseas income and capital gains within the first year, expected to generate approximately £600 million.
Furthermore, Labour plans to allocate up to £555 million per year to bolster the number of compliance officers at HM Revenue & Customs (HMRC). Reeves emphasized Labour's commitment to confronting tax avoidance, asserting that individuals conducting business or residing in Britain should fulfil their tax obligations within the country. She underscored the importance of providing HMRC with adequate resources to combat tax evasion effectively and modernize its operations.
The proposal garnered support from various quarters, with Lauren Crowley, assistant general secretary at the FDA trade union, praising the increased investment in HMRC as essential for maintaining a world-class tax administration capable of addressing evolving technological challenges and combatting criminal activity. Rachael Henry, head of advocacy at Tax Justice UK, commended Labour's initiative to crack down on tax abuse, highlighting the necessity of a well-equipped tax authority to recoup billions in uncollected taxes annually.
What could this mean for UK business owners?
As the probability of imminent tax reforms increases, it is imperative that UK business owners give thought as to how these matters may affect them before it is too late. Seizing the opportunity while the tax rates remain favourable may be paramount. Commencing tax planning efforts promptly not only allows businesses to capitalize on the current lower tax rates but also enables them to proactively navigate forthcoming tax increases throughout the new Government regime.
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