Private Equity Firms Push Deals Through to Beat U.K. Taxman

Private equity firms are racing to sign deals before a potential increase in U.K. taxes in Wednesday’s annual budget.

British ministers have warned that a range of taxes could soon rise to help fund the country’s coronavirus support program. The government has already consulted on overhauling capital gains tax and carried interest, a type of performance fee charged by private equity fund managers.

“We are seeing sellers trying to get deals closed by budget day in case there is a capital gains tax increase,” said Andrew Mills, head of mergers and acquisitions at MJ Hudson Law.

Private-equity clients have been pushing their advisers to get sales done before the budget is finalized, according to two deal advisers, who asked not to be named describing private discussions. Divestments of private equity-owned firms in January and February were at the fastest pace in three years, according to data compiled by Bloomberg.

Mills said some deals are being structured so the private equity fund buying a company will make later performance-based payments, known as earn-outs, subject to the current rates of capital gains tax. That means if tax rates go up, the seller’s tax bill won’t increase if performance hurdles are achieved.

Economic Pressure

Chancellor of the Exchequer Rishi Sunak has hinted ahead of the budget that taxes for companies could rise. The chancellor is grappling with how to rein in a record peacetime deficit without strangling the U.K.’s recovery from its worst recession in more than three centuries.

However, the government could choose to wait until after further rounds of tax consultations beginning late March have concluded.

The industry has spoken out against raising duties on investment gains, which like in the U.S. are levied at lower rates than income tax. The British Private Equity & Venture Capital Association said during last year’s consultation that the industry employed nearly one million people in the U.K. and higher rates might deter investment in the country. Taxes on carried interest are already among the highest in Europe, according to the trade body.

Senior industry figures wrote to the government late last year to warn that executives would leave the country if rates were significantly increased, meaning the U.K. would lose some of its biggest taxpayers, one of the people involved said, asking not to be named.

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