Private equity share deals will be PBR target

The chancellor’s pre-Budget report could contain a clampdown on lucrative
equity contracts used by private equity managers.

Tax advisers say the move is likely, since HM Revenue & Customs was
forced to back down on the issue this year after taking legal advice.

An equity ratchet is a popular type of incentive scheme used in management
buyouts that awards executives with extra shares in a company if revenue and
performance targets are met.

There is confusion, however, over whether benefits awarded in this way should
be treated as shares, which attract taper relief and are taxed at 10%, or income
which is taxed at 40%. The latter would see private equity advisers pay four
times as much tax, or abandon the ratchet remuneration schemes altogether.

‘It is highly likely that the PBR will introduce legislation against treating
ratchets as equity by specifying that ratchets should be taxed as income,’ said
Ross Wilkinson, corporate tax director at Chiltern.

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