- Date
- 18 March 2024
Full Disclosure:
Private Equity and the Carried Interest Loophole
By Jaysen Sutton |
Hi Reader šš½,
The Story:
Imagine I run a private equity firm. I raise money from investors, which I use, together with borrowed money, to buy private companies and turn them around for even more money for myself and my investors. Iām what we call the āGeneral Partnerā or the āGPā and the investors are the āLimited Partnersā or the āLPsā.
Now one way I make money for my private equity firm is through carried interest or ācarryā. Think of this like a performance fee; after the investors have been paid their initial investment, along with a specified rate of return, the surplus is shared between the investors and the private equity firm. It depends on what we agree, but typically 80% goes to the LPs and 20% to the GP.
Because I get to share in the profits, this is a strong incentive for me to perform well.
What you need to know for your interviews:
Now, letās talk about tax. Put simply, I want to pay as little tax as I legally can. The lawyers will help to structure the vehicles involved to make this happen. This is especially important if the general partners are located across multiple jurisdictions.
So why are we talking about this today? Well, Labour has threatened to change the way carried interest is taxed. At the moment, carried interest is considered a capital gain, which means it is taxed at 28%. Labour has said it would treat carried interest as income tax, which would tax carried interest up to 45%.
What does this mean for law firms?
Lawyers at several private-equity focussed law firms have argued that changes to the tax treatment of carried interest makes the UK less attractive as a destination for private equity industry. They argue that the cost to the London economy is greater than the amount Labour would raise by changing the tax rules.
This story is not new. The Good Law Project previously filed a lawsuit against HMRC, the UK's tax authority, for 'its ongoing failure to correctly apply the law on carried interest'. Yet, as discussed by Simmons & Simmons, the current position is not entirely unclear. Law firms with strong private client departments like Macfarlanes and Charles Russell Speechlys will already be reeling from the Conservative's decision to adopt Labour's plans to abolish the non-dom regime. Lawyers will be closing watching the upcoming election to determine how a change in policies will impact their clients.
Have any thoughts? I'd love to hear your perspective below!
| āContact [email protected] with any queries. |
