The U.S. Senate might not vote on carried interest tax treatment this year, but the British Parliament will get a shot.
U.K. Chancellor of the Exchequer Alistair Darling, who is responsible for all economic and financial matters in the British cabinet, last week unveiled his pre-budget report, which includes a provision in which all private equity pros would be required to pay an 18% capital gains rate on carried interest. Under current U.K. law, private equity pros have often qualified for business taper relief that has left them paying just about 10 percent.
The move was met by opposition from buyout pros and venture capitalists in the region. For example, Gary Robins, CEO of Hotbed, Britain’s largest private equity investor, said: “This decision by the Government could have dire consequences for small and medium size businesses throughout the U.K. By introducing a flat capital gains tax rate Darling has effectively removed the tax advantages available to investors who back unlisted companies.”
The British Venture Capital Association also responded: “We are concerned that the elimination of taper relief means all capital gains, including carried interest, will now be taxed at a single rate no matter how long they have been held. This move will hit not just private equity but thousands of venture capitalists, family businesses and small and medium-sized companies. A rate of 18% means capital gains tax is higher in Britain than France (16%), Italy (12.5%) or the United State (15%), let alone countries like Switzerland which have no capital gains tax.”
It is important to note that Darling’s proposal doesn’t automatically become law. It must work its way into a formal finance bill, which must then be debated and approved by the whole of Parliament. That said, this is a Labour Party proposal, and Labour controls Parliment. Unless PE pros are able to swing some Labour votes its way, expect the tax rate to effectively rise from 10% to 18%, come next April. —Dan Primack