31/07/24

UK: UK starts tax crackdown on non-doms and private equity bosses

As published on: ft.com, Wednesday 31 July, 2024. 

The UK’s Chancellor of the Exchequer Rachel Reeves has kicked off plans to end tax breaks for wealthy expatriates and close a tax “loophole” on private equity performance fees.

The Treasury said on Monday it would end what it described as “the outdated concept of domicile status,” and replace it with a shorter, four-year system, from April 2025.

It also gave private equity firms and other interested parties until August 30 to submit details to inform its tax reform of private equity, promising to meet “with a range of expert stakeholders across industry, other relevant professions, academia and elsewhere”. A decision is expected alongside the budget on October 30, it said.

The moves show that the newly elected Labour government is intent on pressing ahead with pledges to increase taxation of wealthy foreigners as well as of buyout fund managers, who receive a share of profits from asset sales known as “carried interest”.

Carried interest, typically 20 per cent of the gains that buyout fund managers generate when they sell investments, has boomed in recent years, fuelled by a long period of cheap debt financing.

Those payments are taxed as a capital gain — at the marginal tax rate of 28 per cent — rather than as income, which attracts a top rate of 45 per cent plus national insurance. Before their landslide victory earlier this month, Labour party officials vowed to raise £565mn a year by increasing taxes on the performance fees.

“The government believes that the current tax regime does not appropriately reflect the economic characteristics of carried interest and the level of risk assumed by fund managers in receipt of it,” the Treasury said.

The proposal to scrap the concept of domicile in tax in favour of a resident-based system, and limit the number of years that individuals benefit from the tax privileges, was set out by the previous Conservative government at the March budget — adopting a policy set out by Labour.

Under the current rules, foreigners living in Britain, but who are ‘domiciled’ overseas, are exempt for up to 15 years from paying UK tax on their foreign income and capital gains.

The UK also seeks to “end the use of offshore trusts to avoid inheritance tax,” the Treasury said.

The government insisted it would “protect the UK’s position as a world-leading asset management hub, recognising that the sector channels vital investment across the UK, and will play an important role in this government’s mission to boost economic growth.”

Michael Moore, head of the industry’s lobby group, the British Private Equity and Venture Capital Association, said the government’s statement was “encouraging” in that it made clear the government’s plans to preserve the industry’s role in the country.

“The BVCA looks forward to responding on behalf of the private capital industry to the call for evidence on changes to the carried interest tax regime,” he added.

Reeves previously signalled plans to continue the UK’s favourable tax treatment of private equity executives in instances where fund managers put their own capital at risk.

The 2,550 private equity executives in the UK made a total of £3.4bn in carried interest in the 2020-21 tax year, according to an analysis by law firm Macfarlanes.

Despite its relatively small size, the industry has an outsized impact on the UK’s economy.

Tags

UK Tax Crackdown Private Equity Non-doms