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Former French president François Hollande dreamt about it. Will it come true under a UK government?
After his election in 2012 the Socialist leader triggered a mini exodus of French private equity executives to London over a pledge to tax “carried interest”, the share of profit they earn on asset sales, at 75 per cent. The rate would only have applied to earnings above €1mn and for two years. But it was part of a longer-term plan to treat “carry” as ordinary income, rather than capital gain, which is taxed at a lower rate.
Hollande ditched the measure, in part because of Paris’s proximity to London. UK shores had allure: the pro-business nation treats carry as capital gain, currently taxing it at 28 per cent. Less than three hours by train, the City was booming. Brexit had not happened so no work visa was required.
Prime Minister David Cameron and London mayor Boris Johnson were rolling out the red carpet for French people seeking refuge from leftwing “tyranny”. Add a favourable tax regime for expatriates, a large French community, good schools and a vibrant cultural life, and the pull was irresistible.
A decade later, the irony is that it is the UK, not France, that is closer to implementing Hollande’s plan. The Labour party, which is leading in the polls to win the general election that is likely to happen this year, has pledged to tax carry as income at a 45 per cent rate. This would place the UK at a disadvantage to European neighbours, which have calibrated their taxation to stay competitive with the City. France, Italy and Germany charge between 26 and 34 per cent on carry.
Labour’s plans have triggered alarm among a section of London-based buyout executives. Those who have also benefited from the “non-dom” regime — that allows people to avoid tax on overseas earnings, and which has just been abolished by the ruling Conservative party — might be particularly tempted to move. “Milan, Athens and Dubai are the destinations a few friends are looking at,” said a French private equity fund manager who has set up his own firm in London.
Over the years, London has become Europe’s private equity hub with a sophisticated ecosystem of consultants, accountants, PR firms and law firms. If the dealmakers move, it will hurt. “It could be worse than Brexit for financial and advisory services in London,” top private equity lawyer Neel Sachdev told the FT this week.
Carry is typically set at 20 per cent of the profit realised by a fund above a minimum return (usually 8 per cent per year). Private equity firms also charge management fees — 2 per cent of funds under management. Carry has been a huge booster of individual fortunes in the past decades as private equity grew to a $13.1tn industry. Ludovic Phalippou, professor of finance at Oxford Saïd Business School, estimates that it has accounted for half of the money received by firms.
The industry’s main argument for the status quo is that because the partners typically invest in the funds themselves — about 1 per cent of the fund is the norm — there is an element of risk-taking, and carry should therefore be considered as a capital gain. However carry, which is set in advance, is not directly proportionate to the initial investment and not all buyout executives invest — making it more akin to a performance fee.
Increasingly defeat for the industry on this debate, which has been bubbling for more than two decades, seems likely, as it has expanded beyond leftwing corners of politics and tax-minded European countries. In the US, birthplace of leveraged buyout behemoths KKR and Blackstone, Barack Obama campaigned on it in 2008 and Donald Trump in 2016. Closing the “loophole” also features in Joe Biden’s second term programme.
“They should just move on, stop complaining and pay their taxes,” the private equity entrepreneur said of his friends with itchy feet.
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