A recent proposal to overhaul the taxation of profits earned by private equity dealmakers has seen significant adjustments following extensive lobbying from industry representatives.

Executives in the private equity sector frequently earn substantial sums from carried interest, which represents their share of profits derived from successful investments managed by their firms.

Currently taxed as a capital gain at 28 percent, the government has announced that this rate will rise to 32 percent starting in April. This change precedes the introduction of a tailor-made tax system slated for 2026, which will align carried interest with the income tax framework.

As a result, the effective marginal tax rate is projected to reach 34.1 percent, according to the Office for Budget Responsibility. This rate is notably lower than the 45 percent maximum income tax that industry leaders had anticipated could be enacted under a Labour government.

The British Private Equity & Venture Capital Association, which actively engaged in lobbying efforts, expressed approval of the developments. Michael Moore, the association’s chief executive, stated, “The government has acknowledged our perspectives regarding the significance of the private capital industry and its contributions to the economy.”

Jacob Gold, a partner at legal firm Ashurst, commented that the industry would be “breathing a sigh of relief” following the announcement.

Concerns had been raised that excessive taxation on carried interest could drive top dealmakers out of the UK, potentially placing Britain at a competitive disadvantage. For comparison, carried interest is taxed at 34 percent in France, 33 percent in the Netherlands, and 28.5 percent in Germany.

Previously, Rachel Reeves, while serving as Chancellor during Labour’s opposition, had committed to closing the carried interest loophole. She argued against the fairness of offering tax breaks to private equity managers amidst their controversial asset-stripping of vital businesses.

Private equity firms typically acquire companies through leveraged buyouts, implementing operational changes and aiming for profitable sales afterward. However, there has been criticism of this model, especially following the struggles of some well-known companies, such as Debenhams, which faced significant challenges due to debt incurred during private equity ownership.

Dealmaker earnings are significant, as they often need to co-invest with their firms to qualify for carried interest. Interestingly, they aren’t always required to have “skin in the game” to earn a share of profits. A report from the Centre for the Analysis of Taxation revealed that 3,140 individuals received a combined total of £3.7 billion from carried interest last year, with around 25 percent allocated to just 30 individuals.

The government anticipates that its reforms on carried interest taxation will start generating revenue in the fiscal year 2027-28, projecting £140 million in tax receipts, which is expected to decline to £80 million in the subsequent year and further to £85 million by the fiscal year 2029-30.

While some dealmakers may choose to relocate due to the amendments, the Office for Budget Responsibility’s analysis suggests that approximately 12 percent of those earning carried interest, responsible for a quarter of total gains, are at heightened risk of migrating within the forecast period, along with a portion of their earnings.

The government has indicated that there will be ample opportunity for engagement with industry experts before the new tax regime is implemented in 2026, allowing for further dialogue regarding potential adjustments.

A representative from a prominent private equity firm noted that it appears Reeves is adopting a “measured” approach toward the reform of carried interest taxation.