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Private Equity Chief Speaks Out Against Funds' Tax Perks

by Jason Gorringe,, London

06 June 2007

One of the leading investors in the UK private equity industry has attacked national tax rules which, he says, allow very wealthy fund managers to effectively pay "less tax than a cleaning lady".

In an interview with the Financial Times earlier this week, Nicholas Ferguson, chairman of SVG Capital, a fund management business listed on the London Stock Exchange, said it was unacceptable that the current tax regime allows highly paid private equity executives to pay as little as 10% tax on some of their income when the standard rate of income tax is 22%, and the higher rate is 40%.

"Any commonsense person would say that a highly-paid private equity executive paying less tax than a cleaning lady or other low-paid workers can't be right," Ferguson told the FT. "I have not heard anyone give a clear explanation of why it is justified."

At issue are the 'taper relief' rules which can reduce the bill on capital gains from the normal 40% rate to as little as 10% the longer an asset is held. While the reform, introduced by Chancellor of the Exchequer Gordon Brown some years ago, was intended to reward continued investment by entrepreneurs in new firms, it has had perhaps the unintended consequence of benefiting private equity bosses whose remuneration is heavily based on the profits their firms generate from selling the companies they buy.

The usual argument made by the private equity industry in defence of the current tax regime is that any move to increase taxation on private equity vehicles would prompt an exodus offshore, and damage the competitiveness of London as an international financial centre. Ferguson counters however, that there are plenty of offshore centres with considerably more attractive regimes than that currently in place in the UK, yet the industry has not deserted London.

While Ferguson's comments of themselves are nothing unusual - the industry has been criticised in the UK for not paying enough tax increasingly in recent weeks - it is perhaps the first time that such a prominent industry figure has voiced such opinions in the public domain, and may prompt more decisive action from the government to reform the private equity tax regime which it has thus far seemed reluctant to do.

Treasury Minister Ed Balls, widely tipped to become the next Chancellor when Gordon Brown moves into 10 Downing Street, told an audience at the London School of Economics in March that the government will review certain aspects of private equity taxation, but appeared not unduly concerned with the much-criticised status quo.

"The question has been raised in recent weeks as to whether our tax system gives an unfair advantage to private equity over other forms of ownership - in particular as a result of the tax-deductibility of interest," Balls said. "There is nothing specific to private equity in the tax-deductibility of interest. Any kind of company can claim it, and most quoted companies do. It is also the international norm - that interest is in general treated as a business expense and deductible from taxable profits for companies in any form of ownership. We have no plans to review this principle."

However, concerns have been raised with the Treasury that 'shareholder debt' is replacing the equity element in highly leveraged private equity funding arrangements. This shareholder debt is a form of risk-bearing equity that is treated as debt for tax purposes, giving these arrangements a tax advantage that is inconsistent with the principle that interest is a business expense.

"I can announce that the Government will review the current rules that apply to the use of shareholder debt where it replaces the equity element in highly leveraged deals in the light of market developments, to ensure that existing rules are working as intended. This is consistent with the Government's focus on ensuring that commercial decisions are taken on a level playing field, take a long-term view and maximise opportunities for employment and investment," the Treasury Secretary stated earlier this year.

A comprehensive report in our Intelligence Report series examining tax-sheltering arrangements for investors, including Venture Capital, Forest Finance, Film Finance, is available in the Lowtax Library at and a description of the report can be seen at

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