Britain will increase capital gains tax on the performance fees that private equity fund managers make when assets are sold to 32% from a current 28%, a smaller rise than many buyout bosses had feared.
UK Finance Minister Rachel Reeves said in her budget announcement on Wednesday that her government would increase the rate on "carried interest" from April 2025 as part of wider increases to capital gains taxes across most assets.
Further unspecified changes will be made to carried interest rules from April 2026, the government said in budget documents, to ensure it is "taxed fully within the income tax framework".
Reeves had previously announced she intended to close a "loophole" that allowed private equity executives to pay 28% tax on their performance gains, raising expectations it could be aligned with the top rate of income tax, at 45%.
"It is welcome that the government has listened to our arguments on the value of the private capital industry and how important this sector is to the economy," said Michael Moore, chief executive of lobby group the British Private Equity and Venture Capital Association (BVCA).
The industry had mounted a lobbying campaign against a big rise, arguing that the sector was crucial to Britain's need for private investment and that large rises could drive wealthy managers overseas.
The BVCA said it would work with the government on implementing the changes.
Carried interest is only paid by around 3,100 people in Britain, according to the government, but has helped mint a generation of private equity multi-millionaires.
Critics say the money they make on fund performance should be taxed as income because it is a reward for doing their job and because private equity firms are mostly investing other people's money.
Reeves said the forthcoming reforms from April 2026 would make carried interest "simpler, fairer and better targeted".
Casey Dalton, partner at law firm Herbert Smith Freehills, said a decision not to introduce immediate reform beyond the tax increase would allow for consultation.
Private equity's well-funded campaigns against closing the carried interest tax break have proven effective elsewhere, including in the United States.
