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CGT rate increase regarded as biggest threat to UK’s attractiveness as a base for private equity

13-May-2010

The Government’s 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, should it apply to them, according to research1 by Investec Private Equity Partner and Fund Finance.

Despite the turmoil of the past two years, the UK is still seen as the most competitive place for private equity firms, beating the US and Switzerland into second and third slots, respectively.

However, research among senior private equity professionals currently based in the UK also reveals that proposed tax changes pose the biggest threat to the UK’s attractiveness as a base for their firms. A 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.

The UK’s tax regime is also considered to be the biggest single issue when it comes to attracting and retaining talented private equity professionals in the UK, with over a quarter (26 per cent) of General Partners (GPs) citing this as the main problem. The prospects for the wider private equity industry are considered to be the next biggest issue, followed by the size of the existing talent pool. Just over a fifth (21 per cent) of GPs do not believe that the UK has any issues at all in terms of talent retention.

In addition, Investec’s research reveals that, in light of the current UK business environment, nearly a third (31 per cent) of senior private equity professionals are seriously considering changing their own residency or that of their firm to outside the UK. The most popular destination cited for those thinking about leaving the UK is Switzerland (48 per cent). This is followed by the Channel Islands or the Isle of Man (19 per cent).

Simon Hamilton, Investec Private Equity Partner and Fund Financecomments: “Our research shows that the Government must take very seriously the risk posed to the UK’s position as a hub for the private equity industry. Punitive levels of taxation could soon drive these talented individuals overseas, which could undermine a potential pillar of future economic growth.”

1 Research conducted by Investec with 92 UK-based senior private equity professionals between 13th and 23rd April 2010.