Increasing capital gains tax could lead to fund managers shying away from “risky, high-return opportunities”, according to Practical VC general partner, Aman Verjee.
This follows rumours that, in the upcoming Autumn Budget, the new Labour government could increase CGT to align with income tax in order to address the £20bn deficit.
This could see the upper band of CGT rise as high as 45 per cent.
Verjee, a venture capitalist based in Silicon Valley, explained that taxes on capital gains and dividends constitute a double layer of taxation.
“By adding another layer of taxation at 45 per cent on what’s left for shareholders, the returns to investors would be severely reduced,” he said.
This would, therefore, make it a lot harder to invest in the kind of risky venture-backed innovation that has, according to Verjee, “created all of the growth in our economy over the last 30 years”.
“If taxes on 'carried interest', which is really the incentive-based pay for managers, are increased, managers have a lot less upside from 'getting it right' and would probably shy away from risky, high-return opportunities,” Verjee added.
He emphasised the importance of this by pointing out that companies such as Amazon, PayPal, Google, Meta, AirBNB, Uber, Netflix were created with this kind of high-risk capital.
“Managers playing for less upside will just 'play it safe' and protect their downside, which makes it a lot tougher to build the next generation of corporate leaders,” he concluded.
Verjee was not alone in his warning however, as DWF Law partner and head of investment funds, Ravi Longia, cautioned: “Hiking the tax on carried interest could have serious consequences for the UK economy.”
He explained approximately 3,000 people receive carried interest per year.
However, while Longia acknowledged this represents a small number of individuals, he pointed out that those affected include key people in private equity, venture capital, and real estate funds, all of which play a critical role in the UK economy.
“There are concerns that a tax hike could deter investment or encourage managers to move to another jurisdiction with more favourable carried interest taxation rules,” he stated.
“In saying this, DWF Investment Funds and Tax teams have been speaking to clients regarding alternative carry arrangements for compensating fund managers and their teams.
“There may be opportunities to preserve the capital nature of carried interest, but this will be subject to the outcome of the reforms.”
Additionally, Net-Worth NTWRK CEO, Wes Wilkes, said: “Bringing CGT in line with income tax would put the brakes on private equity’s appetite for risk, as it directly impacts the earnings of fund managers.
“Carried interest, which is performance-based pay, becomes less attractive under higher taxes.
“This would, therefore, cause private equity managers to shy away from the bold investments that drive exponential returns.
“Such reluctance and a bigger tendency to play it safe could send shockwaves through the broader UK economy, given how crucial private equity is to the UK’s large financial services sector.”
