UK Tax for the Private Equity Industry: 2019/2020 Year-End Review and Outlook

8 January 2020


The UK election handed the Conservative party a decisive mandate to form a majority government to “Get Brexit Done.” While that vote provided a sense of direction, plenty of uncertainties remain. For example, the Conservative election manifesto was curiously silent on changes to UK tax policy that might be needed to help cover funding gaps and improve the UK’s post-Brexit global competitiveness. In any event, private equity firms whose investment structures include UK companies should plan for the fact that they will soon no longer benefit from the EU Directives that currently remove withholding taxes on interest and withholding taxes and income tax on dividends, in each case paid between a UK company and a group company in an EU member state. In addition, the EU Directive that facilitates the tax-neutral treatment of cross-border mergers between a UK company and a group company in an EU member state will no longer apply. However, it appears that there will be no material changes (other than administrative) to the UK’s VAT regime, even though this is an EU-mandated tax. We’ve previously commented, in some depth, on these tax aspects of Brexit.

Conservative Party Tax Policy

Brexit-related tax questions aside, the new Conservative government’s intention appears to be to keep much of UK taxation the same as it is, although there will be changes in some areas. For private equity firms holding UK businesses in their portfolio, the following three points in particular should be kept in mind:

  • The UK’s corporation tax rate will remain at 19 percent (rather than be reduced to 17 percent, as previously proposed).
  • Entrepreneur’s relief, which can lower a UK seller’s effective UK capital gains tax rate on disposal of an interest in a trading business from 20 percent to 10 percent, will be reviewed.
  • Tackling tax avoidance and evasion will be the subject of renewed focus, in part by implementing the controversial digital services tax, which is most likely to affect UK-inbound multinational enterprises with material UK sales.
  • Carried Interest and DIMF Guidance

    The next few months should also bring long-awaited final guidance from HM Revenue & Customs regarding the rules covering carried interest and disguised investment management fees. The extent to which the final guidance deviates from prior draft guidance remains to be seen. Once the final guidance has been published, private equity firms may wish to review their UK principals’ remuneration with their advisers.

    Separately from the new UK tax developments described above, private equity firms that invest in Europe may find themselves directing significant resources in 2020 toward dealing with a number of tax initiatives that had surfaced previously.


    Despite what appears now to be its departure from the EU, the UK has committed to implementing “DAC6,” an EU disclosure regime that will require taxpayers and their advisers to report to EU tax authorities cross-border transactions that touch the EU and include certain “hallmarks.” Because some of these hallmarks are not tax-related, they may expand the universe of reportable transactions in unexpected ways. As we’ve discussed previously, the UK’s draft regulations implementing the regime, published in July last year, suggest that these reporting obligations could be very onerous for private equity firms, their portfolio companies and their advisers. In particular, there is some uncertainty as to whether common fund transactions involving tax-exempt investors or hybrid entities may become routinely reportable. However these issues are resolved, firms should prepare well in advance of the first reporting deadline in August, which will cover all reportable arrangements implemented since 25 June 2018. The final UK regulations are expected in the next few months.

    The ‘Substance’ of Holding Companies

    Over the past few years, the UK and EU have sent increasingly clear signals that UK and European tax authorities will no longer tolerate private equity investment holding structures that lack sufficient substance in their jurisdiction of establishment. One such signal came in February, with the judgment handed down by the senior court of the EU in the so-called “Danish cases.” The court’s ruling indicated that a Luxembourg company, which held a European investment that was ultimately owned by a non-EU private equity fund, had to be the “beneficial owner” of investment proceeds in a broad sense (i.e., not bound to pass on all such proceeds to its owners) in order to benefit from a reduced rate of withholding tax on interest under an EU Directive.

    This scrutiny of holding structures is also reflected in the recent ratification by the UK and many other jurisdictions (including Luxembourg) of the BEPS multilateral instrument (“MLI”). Under the MLI, as of 1 January 2020, certain of the UK tax treaties most commonly used in the private equity context no longer allow the granting of treaty benefits to an arrangement in which obtaining those benefits was “one of the principal purposes” of that arrangement. Private equity firms should carefully assess the integrity of their European investment structures so that they do not fall foul of these changes. For further background, see our notes on the MLI and the introduction of the BEPS Action 6 “principal purpose” test.


    Finally, private equity firms with UK real estate investments should note an important deadline, in April, in the rollout of the UK’s “NRCGT” capital gains tax charge for non-UK resident investors on direct and indirect disposals of UK real estate. One of the major NRCGT structuring tools available to widely held funds is an “exemption election,” which can exempt certain gains from taxation provided that the election is made within 12 months following its effective date. Given that the NRCGT rules came into effect in April 2019 (as previewed in the 2018-2019 YERO), firms that are planning on using the exemption election should aim to make the election, or at least discuss their plans with their advisers and HMRC, by April this year (with an effective date of April 2019) in order to reduce the risk of investors bearing preventable tax costs and a reduction in firms’ carried interest returns.

    This post is an edited version of a note that appeared in our 2019/2020 Private Equity Year-End Review and Outlook. To read the full publication, click here.