TAX NEWS - 2010

UK Budget Unlikely to Drive Private Equity Bosses Away

LONDON -- The private equity industry hasn't been hit as badly as had been feared by the U.K. budget and buyout bosses are unlikely to relocate and take their business elsewhere, experts said Tuesday.

In its inaugural stab at reining in one of the highest deficits in the world, the U.K.'s new coalition government said it would raise capital gains tax, which taxes profit made by individuals on property and assets, by 10% to 28% with effect from Wednesday. The tax is payable on profit above GBP10,000 a year.

But the rise wasn't as large as feared by many private equity executives who have to pay CGT on the carried interest, or the share of profits that fund managers receive as part of their compensation.

"It is a big increase but it could have been a lot worse--many were expecting a hike to 40% or even 50%," said Caspar Noble, a partner in the tax group at Ernst & Young.

Noble said that he didn't think it was sufficiently high to make people relocate as they had threatened.

The sector will also benefit from a reduction in corporation tax from 28% to 27% next year and a further 1% cut in the three successive years. For small firms, Chancellor of the Exchequer George Osborne said corporation tax would be reduced from 21% to 20%.

The cuts are good for private equity-owned companies in the U.K. and will also help the smattering of private equity firms which are managed and employed by a U.K.-based company as opposed to being structured as a partnership, said Noble.