Senior executives of private equity funds have warned that if the British government makes radical reforms to capital gains tax, it could lead to many traders leaving the UK, which would be very detrimental to the UK's economic development.

Last Tuesday, UK Prime Minister Sir Keir Starmer warned in his speech that those with the "broadest shoulders should bear the heaviest burden", which has made the private equity industry in the UK uneasy.

For a long time, many senior managers of private equity funds have enjoyed a special tax treatment - the status of "non-resident" which allows them to reside in the UK and only pay capital gains tax at a rate of 28%. However, this tax advantage policy may now change. If the reform is passed, they will need to pay tax at the highest income tax rate (45% plus National Insurance) instead.

The new Labour government plans to modify the policy on "carried interest" taxation. Specifically, they want to change the tax treatment of performance fees earned by fund managers from asset sales. The newly elected Labour government issued a notice to the industry at an information session that ended last Friday.

Senior executives in the private equity industry generally feel concerned.

Senior executives in the private equity industry are generally concerned about the upcoming budget proposal by the British government, as it will shake up the tax advantages they have enjoyed for a long time.

In the past, the profits of their funds were regarded as capital gains, not regular wage income. Therefore, they only had to pay tax at a rate of 28% on capital gains, instead of the highest income tax rate (45% plus National Insurance). By comparison, the tax on carried interest in France, Italy, and Germany is 26-34%.

A partner of a global top 20 private equity company said, "If the government takes aggressive action in next month's budget, it will encourage people to accelerate their departure from the UK market.

Another executive from a leading private equity group added, "If the attractiveness of the UK significantly declines compared to other countries, and you are not a British citizen, why would you want to stay?

Increasing the capital gains tax could cause a large number of high-net-worth individuals and private equity funds to leave the UK and choose countries with lower tax rates. A top private equity lawyer in London warned that this plan would harm London's status as a global financial trading center, potentially having a greater impact than Brexit.

According to data from the British Private Equity and Venture Capital Association, the UK is the second largest global private equity center after the USA. In the UK, approximately 3,000 people directly benefit from the carried interest system, and more jobs in banking, law, and consulting are widely dependent on the private equity industry.

Well-known private equity companies KKR, Blackstone, and Apollo Global Management all have their major European headquarters in London.

Is the concern exaggerated?

Several private equity executives predict that capital gains tax will be raised by at least 5 percentage points, and there is the possibility of a significant increase in tax rates.

However, there are insiders who believe that the one-month consultation period is too hasty, indicating that the government does not intend to seriously consider their opinions, but is just "talking."

Some executives believe that even if tax rates are raised, it will not have a significant impact on their investment behavior. They believe that concerns about taxation are exaggerated. A partner at an international company said that even if carried interest is taxed at a rate of 45%, "it would be difficult to find a city that can replace London."

The UK Treasury has stated that after auditing expenditure, the Chancellor of the Exchequer has made it clear that in order to repair the economic foundation and address the £22 billion fiscal deficit left by the previous government, difficult decisions will have to be made in terms of expenditure, welfare, and tax.

"We are committed to reforming the taxation of carried interest to achieve fairness in the tax system, while recognizing the important role that our world-leading asset management industry plays in guiding investment across the UK. We have initiated a call for evidence to allow a wide range of stakeholders to provide their views on this."