The Mayfair Loophole: update

A few weeks ago, some 38 Degrees members wrote to their MPs asking them to vote for the Finance Bill. This is because the Finance Act, which has now passed into law, contains some positive steps forward in making the treatment of carried interest (otherwise known as the Mayfair Loophole) fairer.

The core problem at the heart of the Mayfair Loophole is that carried interest – income that is earned as part of a job, rarely as a genuine entrepreneurial investment – is taxed at the lower rate of capital gains, not as income. You can read more about this on the 38 Degrees blog and the full report here.

So, why was the Finance Act a positive step forward? It contains clauses that mean that any ‘carried interest’ income from investments held for fewer than 36 months is now fully taxed at a higher rate as income, not capital gains. And investments held for 40 months or fewer will be at least partly taxed at a higher rate as income, rather than capital gains.

38 Degrees members think that the Mayfair Loophole is wrong because it gives unfair tax treatment to private equity executives, and because it withheld vital money to fund Britain’s hospitals and schools.

This new part of the Finance Act means that more of the time, carried interest will be taxed as income – in just the same way as most of us are taxed. According to the Financial Times, this change is estimated to bring in £210m to the Exchequer next year. It was reported in the Financial Times (paywall) as a “new era” for Britain’s private equity executives, and “a big change for the UK’s sizeable private equity industry.”

The relevant section of the legislation is here, and (slightly) simpler explanations are here from KPMG, and here from gov.uk.

The changes aren’t perfect – there’s still work to do. But it’s a positive step forward. It shows the government is starting to feel the pressure and recognise that in many cases, carried interest is not the genuine return from entrepreneurial investment – and so it should be treated differently.That’s why it’s also encouraging that the government is excluding carried interest from the drop in capital gains tax.

Whatever happens next, 38 Degrees members will continue to work together to campaign for an end to tax dodging and more money for our vital public services.