The UK’s new coalition government has included a proposal to increase the rate of capital gains tax in its budget package. The proposal would increase the rate of taxation for “non-business assets” from the current 18 percent to 40 percent.
It is still unclear whether carried interest would fall into this category, the British Private Equity and Venture Capital Association said in a statement. “It is not clear at this stage what the definition of business asset and non-business asset is,” the BVCA said. “However, it is imperative for economic recovery that no changes are made to discourage investment.”
The government has said there will be some type of exemption for entrepreneurs, but has not released details on this either.
The tax hike was part of the Liberal Democrat’s election platform. The party said during the election that the proceeds would be used to raise the threshold for income tax to £10,000.
The proposed capital gains tax increase may have a “profoundly negative effect on the attractiveness of the UK as a base for the private equity industry”, according to a study by Investec Private Equity Partner and Fund Finance.
Investec surveyed senior private equity professionals based in the UK and found the potential increase in the rate of capital gains tax is regarded as the most significant threat followed by the rate of tax levied on carried interest. The EU’s proposed directive on the regulation of alternative investments is ranked third.
Thirty one percent of those surveyed also said they are seriously considering changing their own residency or that of their firm to outside the UK in light of the current business environment. The most popular destination cited for those thinking about leaving the UK is Switzerland (48 percent), followed by the Channel Islands or the Isle of Man (19 percent).
The Labour government raised the capital gains tax rate from 10 percent to 18 percent in 2008.