Private equity: tax issues

The 2009 UK Budget introduced the 50% income tax rate which will be applicable to taxable income over £150,000 from 6 April 2010.  There have also been restrictions in the tax deductibility of pension contributions. 

However, all capital gains are now taxed at a fixed rate of 18% making the possibility of conversion of income into capital even more important.  The main tax issues for private equity fund managers and partners are:

• Structuring the split of  earned income (salary and benefits) and investment income (e.g loan interest) optimally for tax-efficiency.
• Consider tax treatment of Carried interest and receipts from co-investments.
• Overseas income: UK non-domicilliaries having  income and gains arising abroad should not remit these to the UK and will not be taxed subject to the remittance basis charge for those resident in the UK for 7 out of the last 9 years.
• Earned income: possibility of structuring separate overseas and UK employment contracts provided all the conditions of HMRC guidance in this area are met.
• Possibility of re-locating to a country with better tax breaks for private equity (e.g. Switzerland).

Although the introduction of the 50% tax rate has had a significant effect on the private equity industry there are options available to mitigate the adverse tax consequences.