The British private equity sector is on high alert after Prime Minister Sir Keir Starmer suggested in a speech that those with the "broadest shoulders" could face a greater tax burden in the future. The speech sparked fears in the industry that the planned overhaul of capital gains tax could have far-reaching consequences.

Even before this announcement, the newly elected Labour government had initiated a consultation on changing the tax treatment of carried interest, which ended last Friday. These performance fees that fund managers receive from investment proceeds could be significantly higher taxed in the future.

A partner of one of the top 20 private equity firms worldwide said: "If the government takes drastic measures in the upcoming budget, this could be the point where many accelerate plans to leave the UK.

Furthermore, there are concerns about changes to the so-called "non-dom" status, which allows wealthy foreigners to avoid paying taxes on their foreign income. These changes could further diminish the attractiveness of the United Kingdom for international investors.

Traditionally, private equity managers in the UK benefit from carried interest being taxed as capital gains at a rate of 28 percent, instead of the highest income tax rate of 45 percent plus national insurance. This regulation could now be put to the test.

Some industry experts expressed skepticism about the one-month consultation by the Ministry of Finance that took place in August, a time when many people were on vacation. This could indicate that the government intends to implement its plans without detailed consideration of the industry.

The Ministry of Finance emphasized that it is striving "to reform the tax treatment of carried interest to create fairness in this area of the tax system," while simultaneously acknowledging the "significant role of the British asset management industry.

In a commentary, a leading private equity lawyer in London warned that raising taxes on carried interest could potentially cause greater harm to London's position as a center for dealmaking than Brexit.

The translation of the heading to English is:

"After the USA, Great Britain is the largest hub for private equity investments, with British funds accounting for over half of the private equity and venture capital raised in Europe in 2023. Nevertheless, aggressive tax increases could lead international investors to prefer other locations that offer more favorable tax regulations.

A partner at an international private equity firm said that even if carried interest were taxed at 45 percent, it would be hard to surpass the convenience of London. "Not much will change, no matter what happens," he said.

While some executives warn of a massive exodus, others remain optimistic that the government will not lose sight of economic realities. However, uncertainty persists, and the upcoming decisions by the government could have a significant impact on the future of the British private equity industry.