Summer Budget 2015: What’s relevant for private equity and venture capital?

George Osborne’s speech delivered some surprises but there was more to be discovered in the Budget papers released after he sat down. Below we pick out the key changes for private equity and venture capital announced in Summer Budget 2015.

Carried interest tax increases

UK investment managers are likely to see an increase in the tax they will pay on any carried interest payments as the Government will be introducing legislation to restrict the availability of “base cost shift relief” which allows managers to reduce their tax liabilities.

Carried interest will continue to be subject to capital rather than income treatment but the legislation will ensure that “sums which arise to investment fund managers by way of carried interest will be charged to the full rate of capital gains tax, with only limited deductions being permitted”, according to Budget papers published by HM Treasury.

Managers should prepare to pay the full 28% capital gains tax rate on their carry as opposed to typical rates of 18% or less which some managers have been used to paying.

The changes take effect from Budget day, 8 July 2015, though the detail of the legislation will not be published until Wednesday 15 July, as part of the Summer Finance Bill.

EIS and VCT locked out of deals

New rules will be introduced to prevent EIS and VCT funds being used to make acquisitions of existing businesses. This is a significant and surprising move not hinted at during previous consultations on the tax-advantaged schemes.

The Government’s policy position is that “investments are intended to support the growth and development of the company itself and not expansion by the acquisition of existing companies or trades”. VCTs will not be able to use monies previously protected under grandfathering provisions (i.e. funds raised pre-2012) to fund buyouts, or to fund the acquisition of a trade, whether or not the VCT’s investment would be a non-qualifying holding.

Other changes to SEIS, EIS and VCT announced in the Summer Budget include:

• A new time limit within which a company must receive its first SEIS, EIS or VCT investment of 10 years from first commercial sale for knowledge-intensive companies and 7 years for other qualifying companies.
• A new cap on the total SEIS, EIS and VCT investment that a company may receive of £20 million for knowledge-intensive companies and £12 million for other qualifying companies.

These changes will come into effect when the Summer Finance Bill is passed and State aid approval is received. Our best estimate is that the Summer Finance Bill will pass in mid-October giving a short window of opportunity for EIS and VCT funds to complete their buyout deals.

Limited Partnership reform

The Government will be publishing a consultation on “technical changes to limited partnership legislation to enable private equity and venture capital investment funds to more effectively use the limited partnership structure”.

English limited partnership reform has been talked about for a number of years and has become long overdue as this fund vehicle faces stiff competition from innovative vehicles introduced in other jurisdictions.

We await publication of the consultation but previously mooted changes include a “white list” of actions which limited partners could take without losing their limited liability and the option for the partnership to opt for separate legal personality.