Capital gains tax: Carried interest under threat

Britain's new government is planning a range of tax and spending reforms to deal with its growing public sector debts, recently announcing it would cut public spending by £6bn. However, with a deficit of over £150bn in the last tax year, this is a mere drop in the ocean, and tax rises are also expected to form a key part of the country's new financial landscape, dubbed by Conservative politicians as the "age of austerity".

The government is expected to announce a hike in CGT as part of plans to raise revenues, increasing it from a current rate of 18% to a figure more in line with income tax. This means CGT could rise to as much as 50% for those earning over £150,000 per year, and will have a major impact on the carried interest earned by private equity fund managers.

The British Venture Capital Association (BVCA) has warned the government against increasing the tax, saying it will damage business innovation in the UK and could harm the public finances. There is a precedent here: when the previous Labour government removed the 10% rate for long-term investments - replacing it with a flat 18% rate - revenues from CGT actually fell, down from £5.3bn to just £2.5bn.

It remains unclear whether carried interest will be hit by the tax hike. Thus far, the government has only said it will tax "non-business" assets at a rate closer to income tax. Deputy Prime Minister Nick Clegg has already criticised the current tax system for allowing wealthy financiers to pay less tax than cleaners, indicating a curb on carried interest is likely.

The BVCA says even a modest rise in CGT would make Britain one of the most heavily taxed places in the world, and has called on the government to consult with the industry before making hasty changes.

In political circles, there is also substantial opposition to the hike, with former senior Conservative John Redwood suggesting there could be a backbench revolt over the move. While much of the electorate will shed no tears over higher taxes for the wealthy in the City of London, politicians should remember private equity and venture capital firms pour billions in investment into UK companies each year. The industry will have a crucial role to play in the recovery of the British economy, which will do more to increase tax revenues and curb the deficit than hiking CGT.

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