Budget 2020 and private equity

New Chancellor Rishi Sunak announced new measures in his Budget yesterday. Here are two key impacts for the industry.

Firm and fund-level tax impacts

James Pilbeam, partner at tax, accounting and business advisory firm Blick Rothenberg told The Drawdown there will be some elements of the new Budget specifically impacting fund managers and fund structures. “The tax treatment for fund executives, including those that hold carry, remains the same,” he said. “However, there will be a review of overseas fund structures and whether the UK can be made more attractive as the location for funds. This could involve future changes to UK tax rules to make the UK more competitive as a location for the fund itself. A consultation period is open until 11 May after which the government will review all responses.”

Entrepreneurs’ Relief

Another notable impact comes from the UK Government’s plan to scale back Entrepreneurs’ Relief.

Entrepreneurs’ Relief reduced the amount of capital gains tax founders pay when selling shares in their company. Compared to the normal 20%, the relief measure has taken the tax rate down to 10%, up to a value of £10m over the individual’s lifetime.

The measure has not been completely repealed but has been cut back significantly.

The amount of relief that can be claimed now is just £1m, the same level of relief that was available when it was put in place in 2008.

“While the tax rate has remained the same, this will have some impact at the private equity portfolio company level for management teams holding shares, although the Budget in October 2018 previously introduced restrictions which since then have led to this relief being far less available,” Pilbeam added.

“Also at the portfolio level, key tax reliefs for UK companies with research and development activities and which acquire intangible assets such as intellectual property rights have become more generous. Funds which have sector focus in, for example tech, will welcome these measures.”

Chief executive of Calculus Capital John Glencross found some positive in the change:

“There had been too many representations in its support for the Chancellor to scrap Entrepreneurs Relief completely, but a tightening of the rules was expected. As it stood, it was a flawed relief that benefited few and was not felt to be critical in incentivising risk-taking entrepreneurs. Crucially, for the growth economy, EIS and VCT incentives remain in place to ensure growing businesses have access to risk capital.”