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How London’s private equity professionals pay less tax on carried interest

Private equity is where the money is – all bankers know that.

And most bankers know that income tax in London is 45% on incomes over £150k. This is what makes carried interest payments in private equity so popular - above a hurdle, the returns from exited investments are distributed to employees and are then taxed as capital gains, at a rate of 28%.

What fewer people know is that there are loopholes that enable the tax on capital gains and income to be reduced further.

Oliver Saiman and Nick Ritchie at RBC Wealth Management in London explain how they work in a recent article on tax planning for PE professionals. By reinvesting (realised) carried interest into a company that accesses the government’s Enterprise Investment Scheme (EIS), they say that private equity professionals can not only defer their capital gains tax, but offset 30% of their total investment against their income tax obligations.

Investing in start-ups is far from risk-free and the UK tax rules are complicated but with carried interest being worth up to €25m over the life cycle of a fund according to Heidrick & Struggles, senior private equity professionals might have money to spare. 

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AUTHORZeno Toulon

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