Cleaning up private equity
Will people still want to work in private equity if they have to pay tax at a higher rate than the average cleaner?
Gordon Brown has promised to "review" the tax advantages of working in private equity after Nicholas Ferguson, chairman of SVG Capital, informed the Financial Times earlier this week that lax capital gains tax rules mean many of his counterparts pay "less tax than a cleaning lady."
This is very true - the carried interest private equity execs earn (which can amount to many millions over several years) is taxed at 10%. And the average cleaning lady earning 15k pays nearly 2k in tax.
But will the flood of staff from banking to PE hit a wall if Gordon bumps up the tax rate? Without a doubt, according to David Howell, managing director of search firm EM Finance: "Low tax rates are absolutely a major reason why people want to work in private equity," he tells us. "We get people who are willing to accept a 60% reduction in base pay and bonus in return for carried interest over a period of years."
Whether the worst will actually happen is another issue. One private equity exec says the government will have problems putting an end to the industry's current favourable tax treatment which comes from taper relief applied to all capital gains: "They can't do it without affecting all kinds of other areas," he says. "It won't happen."
They can but hope.
