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FAKE IT TIL YOU MAKE IT
Risks from synthetic risk transfers
ONE DIRECTION
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The future of direct lending
ACI’s webinar, supported by Kuflink, debated the UK property market >>
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ISSUE 95 | JULY 2024
Labour’s tax crackdown would hammer UK private credit sector LABOUR’S carried interest tax reforms would have a costly impact on the private credit sector and could lead to a talent exodus from the UK, according to legal experts. The Labour Party has pledged to raise £565m a year by changing the taxation regime for private markets managers’ profits from successful deals, known as carried interest. Currently, these earnings are taxed as capital gains, levied at a lower rate than income. “Many private credit funds will have a carried interest arrangement rather than a performance fee arrangement,” said Mark Stapleton, tax partner at law firm Dechert. “Of course, if these proposals come in, there’s a serious concern that they will all be turned into income, potentially taxable at the highest rates.” Reports of the proposed
Shadow Chancellor Rachel Reeves Credit: Chris McAndrew / UK Parliament
tax changes have mainly centred on private equity firms, which have a more obvious capital gains structure due to their sale of holdings in companies. One global private markets fund manager told Alternative Credit Investor that it has very little exposure to carry,
with the vast majority of its earnings coming from management fees. But Stapleton says this is not typical for private credit funds and carried interest is often adopted by the sector’s managers. “With a private equity fund, they’re selling companies so that’s a
capital gain, but with private credit, it’s often income in nature such as interest payments,” said Stapleton. “But even so, it’s usually possible to make sure that a good proportion of what is returned as carried interest is capital in nature and can get capital gains tax treatment. “This is especially relevant for distressed debt funds, which can make pull-to-par gains. "Another example is lending by special situations funds, where the fund may also get something like a warrant alongside a loan that will produce a capital gains return, so that would also have an impact.” Shadow Chancellor Rachel Reeves (pictured) clarified the proposals last month to indicate that carried interest would continue to be taxed as capital gains if fund managers put their own capital at risk >> 4