‘Bag ready’ private equity execs more worried about Reeves’ carry policy than Corbyn
Private equity execs are “bag ready” to leave the UK and avoid Labour’s carried interest policy, with some City lawyers giving more legal advice than when Jeremy Corbyn was leader, leading industry figures and advisers have said.
The Labour party came into power promising to remove what it sees as a tax ‘loophole’ that private equity managers have taken advantage of called ‘carried interest’.
The move would see the tool – one of the main forms of remuneration in the industry, which allows managers to scrape off a portion of an investment’s profits for themselves – taxed as income rather than a capital gain. The former attracts a much higher rate of tax.
Labour claims it will raise over half-a-billion pounds from the policy but it has set nerves ablaze in the industry, with one law firm claiming it was receiving more calls than ever about a move away.
Jason Clatworthy, managing director of Alvarez & Marsal’s UK tax division, told CityAM: “From Easter onwards it was very noticeable that the number of inbound calls we were getting from private equity executives really wanting – for the first time in my career – to properly understand their options and paying for advice to leave the country.
“A number of my clients have spent money with us and the sector more broadly to be ‘bag ready’ to go… and there was a lot of them.”
During the election campaign, Rachel Reeves clarified that the uplift would not apply to managers and investors who were putting their own capital at risk and said she would consult on the change. But despite this concession, Clatworthy added that he “hadn’t seen as much advice taken when Corbyn was leader”.
Managers considering a move is ‘inevitable’
Sandy Bhogal, a partner and co-chair of Gibson Dunn’s global tax practice, was more sanguine saying: “It is common knowledge that Labour have long had issues of principle with the non-dom regime and capital gains carried interest, but they also recognise the importance of international capital investment, and the asset management industry, to the UK.
“Labour will have seen the state of the public finances and recognise the dangers of populist, knee jerk, changes.”
James Burton, tax partner at A&O Shearman, added: “It seems inevitable that those affected will consider the impact of these changes on their personal circumstances and some may choose to relocate away from the UK. This of course could impact the overall projected revenues from this measure.”
But Burton caveated this by saying there was “very little clarity on the proposals” as yet.
Some industry insiders, however, acknowledge a change to carried interest to be overdue because the reward managers receive dwarfs the risk they take. One told CityAM: “Nobody in the industry I know has actually vented their frustration about it, because we all know [carried interest] is a nasty little loophole that makes all the private equity lot very rich.”
Labour begins its administration with the public finances having been described the Institute for Fiscal Studies as “parlous”. It is therefore unlikely to renege on what is one of the few revenue raisers in its manifesto.
But Clatworthy warned that as well as risking the loss of executives themselves, going ahead with the policy as planned will put foreign firms off setting up. “I can think of at least three clients I’m supporting now who, previous to this rhetoric, the plan was to set up in the UK – UK staff, UK manager, UK fund structure – they’ve now asked us to draw up alternatives.”
A Treasury spokeswoman said: “We are committed to deliver the government’s manifesto commitment to reform carried interest and ensure fairness in this area of the tax system.
“We are focused on economic stability, and we will always ensure that Britain is a great place to do business.”