Britain’s secretive millionaire-making industry at risk of a £500m tax raid
Lucy Burton
8 min read
Rachel Reeves during a visit to the floor of the New York Stock Exchange last year. Reeves returned to NYC last month, when she met Blackstone’s multi-billionaire founder Steve Schwarzman for a private dinner - Brendan McDermid/Reuters
The secretive world of private equity has never had the best public image. A camel was once paraded outside former private equity chief Sir Damon Buffini’s church in Clapham, south London, by the union GMB to demonstrate it is “easier for a camel to go through the eye of a needle than for a rich man to enter heaven”.
Aware that he had become a union target and a figurehead for the industry after a private equity takeover of AA led to sweeping job cuts, the City tycoon running Permira went on to make a point of punishing colleagues who had got “too big for their boots”.
After overhearing staff complaints about the food served in a Michelin-starred restaurant during a work trip, he handed everyone reheated McDonald’s burgers at the next lunchtime meeting.
This was just before the financial crisis, when the industry was being slated for slashing jobs, loading companies with debt and asset-stripping while partners made a fortune and paid little tax.
Rows involving private equity backers have only grown since the crash, as ultra-cheap credit triggered a private equity buying spree and made the industry a global winner from the carnage that struck the banking system.
Tony Robbins, a personal finance expert, told a US TV show earlier this year that $1m (£750,000) put in the S&P 500 35 years ago would now be worth $26m, while the same million put in private equity would have ballooned to $139m.
Critics argue that private equity firms hollow out businesses to make quick returns, making their bosses rich while swallowing corporate Britain whole.
Chancellor Rachel Reeves now has these buyout barons in her sight ahead of next month’s Budget, eyeing a tax crackdown on private equity bonuses.
The Treasury is currently consulting on plans to change the rate charged on so-called carried interest, which is taxed as a capital gain of up to 28pc rather than the top income tax rate of 45pc and forms a crucial part of private equity pay packages.
Jonathan Reynolds, the Business Secretary, said before the election that it was “absolutely right” to get rid of it, but private equity chiefs are hoping they can convince Labour to have a rethink now they are in power.
Gordon Brown pledged a crackdown on carried interest tax when he was prime minister, but never did cut it, while an attempt to change carried interest rules in the US was blocked by a senator in 2022.
Fierce lobbying from the private equity community is now heating up ahead of the Oct 30 Budget, with private equity tycoons planning to hobnob with influential politicians at this week’s Labour conference and next month’s investment summit.
An industry insider says that private equity has been “trumpet marching up and down Whitehall” trying to make the case for the Chancellor to back down on the idea by highlighting the economic benefits that it brings.
The Government estimates that it could raise more than £500m from the roughly 2,000 people who receive carried interest each year. But there are fears in City circles that taxing these individuals at 45pc would cost the Exchequer money instead of bringing it in, by leading to an exodus of cash and talent.
The action plan for private equity executives at this week’s Labour conference is to highlight to MPs which businesses in their constituency are private equity-backed, says one attendee, adding that the list includes “Hovis bread, Tangle Teezer, go-karting – we’ve got biotech and people who make doors, hairbrushes and bread”.
British companies backed by the industry include the supermarkets Asda and Morrisons, cafe chain Pret A Manger, defence company Cobham and Legoland operator Merlin.
The pitch to ministers is that private equity makes a major contribution to the UK economy and that any change could hand European Union rivals a competitive advantage – France, Italy and Germany all tax carried interest at between 26pc and 34pc.
The British Venture Capital Association (BVCA), the body representing the industry, has told the Treasury that the 12,000 businesses backed by private capital generated £137bn of GDP in 2023 while private equity directly employs 140,000 people.
BVCA boss Michael Moore argues that the job “involves taking risk” and the tax perk only kicks in when returns hit high thresholds.
Some private equity chiefs have clubbed together to hire external consultants with close political connections to fight this battle, sources say. But despite their efforts, industry veterans think the lobbying has already failed.
Jon Moulton, the boss of private equity firm Better Capital, says “many think the battle is already lost so will vote with their feet”.
“Quite a few private equity firms professionals are actively looking to move away from UK taxes,” he says. “For those working across Europe from a UK base it’s not a real hardship to move their tax base to [somewhere like] Ireland or Luxembourg.”
Sir Michael Spencer, a City tycoon and Tory donor, suspects the Government will harmonise capital gains tax with income tax which will “remove entirely the current tax advantage of carried interest”. He expects some private equity barons to relocate as a result, “especially if they have few ties to the UK”.
The comments echo warnings from Rob Lucas, the boss of CVC Capital Partners, who earlier this month warned that the looming tax changes could “influence where some people want to be based”.
His comments came as CVC’s partners earned €108.7m (£91m) in carried interest and performance fees for the six months to July, up from €83.3m last year.
The industry is hoping that there will at least be a compromise. Jonathan Blake, a lawyer at Herbert Smith Freehills who was involved in creating the original carried interest system in the 1980s, says there have been hints that if the system is changed “it may not be to the full rate of income tax”.
A winning argument will not just rely on a threat of a talent exodus.
“It doesn’t go down too well saying ‘if you tax me, I’ll go and live somewhere else’ – that has turned out to be a hollow threat on previous occasions, like Brexit,” Blake adds.
Indeed, financiers who work in other sectors have little sympathy for these multi-millionaires. The largest private equity firms in the world have avoided paying income taxes of more than $1 trillion since 2000, Oxford University found earlier this year.
One City veteran says “no one supports private equity on carried interest except private equity people”, arguing that the high returns aren’t considered merited by many.
He agrees that the “‘everyone is going to leave’ chat is of course not true” as the UK remains an attractive place to live for the wealthy.
It’s no surprise that many aren’t keen to see ultra-rich private equity chiefs continue to cash-in on tax loopholes.
While banks have been heavily regulated since the financial crisis, limiting their ability to make risky bets, borrowing by private equity is not monitored to the same degree.
Those at the top of the industry have enjoyed a surge in the value of their fortunes. Blackstone, one of the world’s biggest private equity firms which has been expanding rapidly in the UK, is estimated to have earned $33.6bn in carried interest fees since 2000.
The firm’s multi-billionaire founder Steve Schwarzman – who met Reeves last month for a private dinner in New York – is in the middle of refurbishing his £80m estate in Wiltshire and is turning his century-old mansion in Rhode Island into a museum.
Blackstone, founded by Steve Schwarzman, is estimated to have earned $33.6bn in carried interest fees since 2000 - Simon Dawson/Bloomberg
Private equity executives danced the night away to DJ Fatboy Slim and rapper Flo Rider at an industry conference in Berlin earlier this year.
A cut to the private equity tax perk could come just as fortunes for the industry turn after over a decade of low interest rates.
Marc Nachmann, the head of Goldman Sachs’ wealth and asset arm, warned earlier this year that private equity executives will have to work harder in the next 10 years as they can no longer rely on the cheap cost of capital.
In the coming weeks, UK-based bosses in the sector will be doing all they can to convince ministers that the heyday must continue.
A Treasury spokesman said the Government is “committed to reforming the tax treatment of carried interest, delivering fairness in this area of the tax system while recognising the vital role that our world-leading asset management industry plays in channelling investment”.
