Private equity barons breathe a sigh of relief as Reeves is forced to back away from their bonuses

The Chancellor was yesterday forced to water down a tax raid on private equity bonuses amid fears it would spark a mass exodus from the UK.

Rachel Reeves increased the tax on carried interest – the portion of investment returns shared by private equity executives – from 28 per cent to 32 per cent from April next year, and to 34 per cent by 2026.

The announcement came as a ‘relief’ to the buyout sector which had feared the bonus, which has helped executives amass huge personal fortunes, was facing a rate as high as 45 per cent.

But the Chancellor also said there will be reforms to make carried interest rules ‘simpler, fairer and better targeted’ – casting doubt on the future of the favourable tax treatment.

Private equity groups launched an urgent lobbying campaign against Reeves ahead of the Budget amid fears she was planning to bring the levy in line with the top band of income tax.

They warned it would cause multimillionaire buyout bosses to leave the UK for countries with a more favourable tax regime such as Italy, Greece and Dubai.

That would have resulted in a lower tax take for the Government and reduced investment in the UK, they said.

Michael Moore, chief executive of the British Private Equity and Venture Capital Association, said: ‘It is welcome that the Government has listened to our arguments on the value of the private capital industry and how important this sector is to the economy.

‘Our industry will work with the Government as it consults on implementing these changes and ensures any risks of reducing investment are mitigated.’

Nicolas Moura, an analyst at private equity data platform Pitchbook, said it was a ‘good compromise given there was talk of taxing carried interest as income at the higher rate of 45 per cent’.

He added: ‘We don’t believe this will move the dial or drive an exodus of private equity from the UK. The highest earners in these firms are usually already located in tax-efficient locations.’

Nimish Shah at advisory firm Blick Rothenberg said: ‘The private equity industry will be relieved at only a 4 per cent increase to the carried interest rate.’

Reeves’s tweak – which puts the UK’s carried interest tax higher than Germany, Italy and Spain – will raise just £100million by 2029-30, according to the Office for Budget Responsibility (OBR).

The estimate assumes that around 12 per cent of carried interest earners – which would total around 360 people – are at ‘high risk’ of fleeing the UK within the next five years due to the tax changes.

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