The UK Treasury could potentially raise up to £1bn in additional revenue by taxing private equity profits as income, according to a report by the Financial Times citing a new study by the Centre for the Analysis of Taxation.
The research suggests that increasing the carried interest tax rate to 45% would only reduce the take-home pay of the top 100 private equity executives by 16%, challenging the notion that a tax hike would drive investors out of the UK.
The taxation of carried interest — the portion of profits private equity managers earn on successful deals — has become a hot topic in anticipation of next week’s Budget, where Chancellor Rachel Reeves is expected to outline plans to improve public finances. Labour has previously described carried interest as a “loophole,” pointing out that it is currently taxed at the capital gains rate of 28%.
A Treasury report earlier this year found that 3,000 private equity managers earned £5bn in carried interest for the 2022 tax year. Researchers applied findings from past studies to predict how taxing carried interest as income could impact private equity professionals’ willingness to remain in the UK. Their analysis suggests a £300m to £1bn revenue increase, largely from executives who have resided in the UK for over a decade.
Reeves recently indicated that she may not take an “ideological” approach to the issue, expressing concern over preserving investment in the UK. Andy Summers, associate professor of law at the London School of Economics and a co-author of the study, noted that “a high tax rate on carry translates to a much smaller reduction in take-home pay,” which he believes would have a limited effect on executives’ migration decisions.
Currently, foreign executives make up about half of all recipients of carried interest in the UK, with 90% of carry to non-UK citizens going to those who have lived in Britain for at least a decade. The study’s findings also contrast with a Conservative government report predicting that taxing carry at 45% could potentially lose up to £900m by 2026 due to an exodus of buyout managers, or at best, yield £200m.
