150 top UK private equity professionals earn exorbitant amounts of carried interest
As British private equity professionals wait to see what the October budget has in store for the taxation of carried interest payments, it's becoming apparent that a few individuals at the top of the industry have a lot to lose.
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In a report yesterday, the Resolution Foundation highlighted the distribution of carried interest payments between UK private equity professionals in 2020-2021, the data for which was extracted in January 2023.
While nearly 2,600 people in the UK receive carried interest, most of this goes to 150 people at the very top of the industry. As the chart below shows, four years ago they received an average of £15m each.
If carried interest is taxed as income, at 47% (or even 53%, as advocated by the Resolution Foundation), instead of as a capital gain at 28%, these 150 people stand to lose between £2.9m and £3.8m each on an annual basis, which explains why the move is not popular.
The Financial Times reported earlier this month that some senior private equity professionals are considering migrating to countries where carried interest is taxed more favourably. “Many of the people who are based in their European headquarters in London — French, German or Italian — have no loyalty to the UK at all” one London-based private equity partner told the FT.
Michael Moore, chief executive of the British Venture Capital Association, said the UK needs to be an attractive place for private capital firms to invest. “Making investments to grow companies involves taking risk, and this is reflected in the proportion of private capital funds which achieve sufficient returns to pay carry," said Moore. "These are long-term partnerships, with funds typically lasting for ten years or more, and investors demand that returns reach high thresholds before any carry is paid.”
Private equity firms are predictably looking for ways to mitigate the expected tax change. Their plan is seemingly for employees to invest their own money in funds so that profits paid as a result of returns on investments still qualify as capital gains. The FT says lobbyists are pushing for money lent to employees (by funds) which is then invested in funds to still count as skin in the game.
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