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The Labour party was pummelled with arguments from wealthy groups seeking to avoid harsh treatment in its first budget. Last week, the government made its choices clear: private equity executives were largely let off the hook, but non-doms will pay billions of pounds more.
Chancellor of the Exchequer Rachel Reeves set out £40 billion (S$68.6 billion) in extra taxes on Wednesday (Oct 30), in a move she said was necessary to repair the public finances and invest in services. Overall, it’s received tepid support from the business world.
For private equity, the widely-trailed tax rise was seen as favourable – certainly when compared to Labour’s hostile signals for the sector in advance. The hike in duties on carried interest, to 32 per cent from 28 per cent, will affect about 3,100 people working in the investment management industry, according to the government, and will raise an extra £300 million through 2030.
At the other end of the scale, one of the biggest money-raising measures was the removal of the non-domicile rules, expected to rake in some £12.7 billion through 2030. The government said about 25,000 people will qualify for four years of tax breaks on foreign income, while 9,300 people will be ineligible – and officials said at least a thousand are expected to leave.
After Labour won the general election in July, new Prime Minister Keir Starmer laid the groundwork for a budget that would be particularly painful for those “with the broadest shoulders”. As ministers spent the summer talking up the economic damage wrought by the previous government, they raised fears of a spike in tax burdens for the wealthy.
“The chancellor’s time at the dispatch box mirrored the prime minister’s sentiments that those with the broadest shoulders should bear the largest burden – we now have some clarity over what this government deems ‘broad shoulders’ to mean,” said James Cook, private client partner at law firm Russell Cooke.
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Positive outcome
Inside private equity firms, the mood was one of quiet celebration so far. There’s still a consultation to come on issues such as how much managers have to contribute in their own funds and how long they must hold investments to show they’re truly risking their own money. Currently, just two in five carry recipients co-invest, according to the Centre for the Analysis of Taxation.
From April 2026 there could be further changes stemming from the consultation, while the tax rate will rise to 34.625 per cent as it will include national insurance for the first time, although the government has said it will only tax 72.5 per cent of carry, Michael Graham, a tax partner at law firm DLA Piper, has calculated based on Treasury documents.
It means the tax on carry is going up four percentage points, in proportion with the main capital gains tax rise, with only a small increase after that – a very positive outcome, Graham said.
The changes look particularly good for credit funds, which tend to pay a mix of income tax and carried interest tax, and will move to the lower flat rate under the changes, according to Graham. But venture capitalists are less well off, as their 28 per cent rate will go up and they do not look set to benefit from other changes, he said.
“The increase is the minimum that the government would accept,” he said, especially since Labour had signalled repeatedly that the rate would rise. Still, carry will be considered income tax, and it could raise further in the future, he said.
“We’ve got more confidence today than we’d had yesterday before the budget was announced,” Michael Moore of the British Private Equity and Venture Capital Association said to Bloomberg Radio on Thursday. He highlighted that his membership had funds available to spend on British projects. “In terms of what we invest in – and there’s 178 billion of dry powder yield capital available to deploy – typically we would invest 50 per cent of that here in the UK.”
That capital could come in useful for Labour’s promise to unleash a wave of private funding into large-scale public projects. Starmer used last month’s investment summit to unveil £63 billion of new and already-agreed investments, while proclaiming growth and wealth creation were the cornerstones of his government.
Driving away
For wealthy foreigners who live in the UK and have non-dom status, the budget was tougher, mainly because it pressed ahead with plans to bring their overseas wealth inside the inheritance tax regime over time. It isn’t an “exodus”, Amanda Tickel, Deloitte’s global tax policy leader, told Bloomberg Radio, but the idea of their descendants paying UK death duties is driving some away.
Labour did not yield to lobbying for a new tiered system, and instead stuck to plans for a residence-based programme. “The government has played politics with foreign investors and the economic result will be a long-drawn out Liz Truss budget,” said Leslie Macleod Miller, chief executive of Foreign Investors for Britain, which campaigned for a more generous regime.
Some of the wealthiest will leave the country rather than take the hit on their global assets. The Office for Budget Responsibility (OBR), which scrutinises the state’s spending figures, estimates that between 12 per cent and 25 per cent of those who aren’t eligible for the replacement for the non-dom system will emigrate – meaning between roughly 1,100 and 2,300, although predicting how many people will uproot their lives for tax reasons is difficult.
The changes indicate Labour believes many of the country’s wealthiest foreigners are bluffing with their threats to leave. While cities such as Abu Dhabi and Milan have frantically been courting them with a bevy of tax perks, officials have long said that it will be harder for non-doms to leave London than they let on.
“I remember asking the HMRC (His Majesty’s Revenue and Customs) officials, ‘You can’t tell me, but could you just Google the 50 biggest and find out if their kids are school age?’” Andy King, who was a member of the OBR until last year, said at a Bloomberg event Thursday. “Are they likely to move?”
Still, officials have thought out the plan and produced plenty of details to back it up, according to Alex Henderson, tax partner at PwC. The government is trying to persuade the wealthy to bring their riches onshore and spend them in the UK, with an offer that some may like as a way to simplify their arrangements.
But making those changes is complex and expensive, and there will be “considerable concern” that wealth with no connection to the UK could be liable for inheritance tax, Henderson said.
The OBR’s prediction that as many as a quarter would leave is up from its forecast of a fifth in March, when former Conservative chancellor Jeremy Hunt set out similar plans.
If Labour has got the balance wrong, it will be “terrible news” for the country, according to Dominic Lawrance, partner at Charles Russell Speechlys.
Farm land
Labour is not just extending inheritance tax to non-doms. There has also been outcry about bringing in agricultural land worth more than £1 million into the levy. However, Dan Neidle, founder of Tax Policy Associates, said only 500 farms claimed relief above £1 million in 2022, and married couples can claim allowances to bring it down further.
Another way to hand money to the next generation, via pension savings, is also becoming more difficult. According to government estimates, around 49,000 estates with pensions per year are facing a bill. This comprises 10,500 where a pension drags them above the inheritance tax threshold, and 38,500 who will now face an additional bill.
The process for bereaved people will be a “nightmare”, according to Steve Webb, partner at pension consultants LCP and former pensions minister. BLOOMBERG