The Chancellor has announced widespread changes to capital gains tax (CGT) which include an increase to the rates charged on carried interest.
Carried interest is the share of profits that is often paid as a performance or incentive fee in private equity or hedge funds arrangements. These are often structured as limited partnerships, with these fees being paid as an incentive to the fund’s general partners.
Previously these payment were subject to CGT, at either 28 or 18 per cent, depending on the partner’s marginal tax rate. But in making changes to CGT Rachel Reeves has introduced a single rate for carried interest at 32 per cent.
This change is lower than many previous expected, as Labour has previously said it was looking to close a loophole that has seen carried interest taxed as a capital gain rather than as income. It is understood that this change will affect around 3,100 individuals.
Overall Reeves has raised the main CGT rates from 20 per cent to 24 per cent for higher rate taxpayers and from 10 to 18 per cent for basic rate taxpayers.
The British Equity and Venture Capital Association chief executive Michael Moore more welcomed the move to limit this tax rise. “It is welcome that the government has listened to our arguments on the value of the private capital industry and how important this sector is to the economy,” he said.
“The announcement on carried interest recognises that a tax treatment which reflects the long-term, risk-based nature of private capital investments is necessary to ensure that this important UK sector can continue to flourish in an increasingly competitive international environment.”
The Labour Government, like the Conservative administration before it has been trying to boost DC pension investment into private markets. This is likely to lead to increase investments into private equity ventures. In order to facilitate this changes have been made to the DC default charge cap, which specifically exclude performance or incentive fees.
