Darling Dismisses Taper Relief

The U.S. Senate might not vote on carried interest tax treatment this year, but at least the British Parliment will get a shot.  

The UK private equity market is already letting its displeasure be heard loud and clear, as I have no fewer than 10 unsolicited statements from various firms. For example, Gary Robins of Hotbed said: “This decision by the Government could have dire consequences for small and medium size businesses throughout the UK. By introducing a flat capital gains tax rate Darling has effectively removed the tax advantages available to investors who back unlisted companies.”

UK Chancellor of the Exchequer Alistair Darling today unveiled his pre-budget report, which includes a provision whereby all private equity pros would be required to pay an 18% capital gains rate on carried interest. Under current UK law, private equity pros have often qualified for business taper relief that has left them paying just around 10 percent.

The British Venture Capital Association added: “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 US (15%) – let alone countries like Switzerland which have no CGT.”

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 Parliment. 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.

(Thanks to Peter Goodman, head of tax at Wilkins Kennedy, for helping me understand current UK law)