Business

Neil Collins’ Notebook – Spare us from tax, say private equity kings

BY Neil Collins   /  11 September 2020

If you have tears, prepare to shed them now. Should the UK’s tax-savvy entrepreneurs be made to pay more, then they will all flee the country. Well, you can hardly blame a trade body for sticking up for its trade, but the pre-emptive strike from the British Private Equity & Venture Capital Association to the hint of reforms to capital gains tax is, like so many of its members, a bit rich.

The real gravy in the private equity game is the so-called “carried interest”, essentially a punt on a deal turning out as good as hoped, and which can yield multiples of the six-figure basic salaries that come up with the rations for participants. Carried interest is treated as capital gain, rather than income, and so is taxed at 28%, rather than the 45% top rate of income tax.

Apparently, the boundary between income and capital tax rates “is conceptually drawn in the right place,” in the opinion of the BVCA in a private paper. Others disagreed. The Financial Times’ report of it this week produced 435 responses, mostly varying from slightly cross to spitting tacks. As some of them pointed out, to call carried interest a capital gain is something of a stretch, since there is often no capital at risk in the first place.

The BVCA is right to be apprehensive about whether the Office of Tax Simplification will look hard at the treatment of this clear anomaly, since the chancellor will know all about it from his time in the City. The practice is often dressed up as an incentive for entrepreneurs to take big risks in the hope of creating valuable businesses, but much more frequently is a pass-the-parcel game between private equity groups, using state-of-the-art financial engineering. Venture Capital Trusts, which really do back small businesses, are of little interest to the private equity kings.

The BVCA made similar arguments about damage when the rate on carried interest was raised from 18% to 28%. Since then, the industry has boomed. Today. the challenge for most private equity groups is finding suitable homes for their “dry powder”, capital committed for them to invest. If ever there was a suitable moment to deal with this anomaly, now is surely it. 

 The Help To Buy con trick

Look, we’ve got it all wrong on Help to Buy. Some of us uncharitable writers dubbed it Help to Buy Builders’ Yachts, as the subsidy allowed them to double their profit margins on new houses sold under the scheme. But it seems everyone can be a winner. 

Homes England, the government agency in charge, has advanced £16bn since that nice George Osborne started the scheme in 2013. Apparently, it will recoup all that money by 2032, and make a profit for the taxpayer by the time all the loans have been paid off in 2048.

This is truly magical economics: 272,852 happy homeowners up to last March, builders becoming rich beyond the dreams of avarice, and a profit for the taxpayer. What could possibly go wrong? Ah, say those spoilsports at the National Audit Office, what if house prices are not, after all, on a stairway to heaven? They worry that homeowners could find the house worth less than the debt they (and it) carry, and that the taxpayer “could lose out significantly.”

Greg Fitzgerald is the veteran brought in to rescue Bovis Homes from its own incompetence. He changed the company name to Vistry, and this week revealed the first results of his management, but he told The Times: “This will be my first downturn, if it ever turns into one on the housing side, where the government has a huge stake in the housebuilding market.”

Second hand sales do not attract HTB, so will the secondhand buyers pay up? Who will homeowners who have effectively paid a premium going to blame if negative equity looms? The answer, of course, is the government. We have come so far down this road that the political cost of allowing the much-needed bear market in housing is always going to be too great. Or, as Mr Fitzgerald puts it: “I just question whether the entire housing market is too big to fail.”

Alors Aviva!

There are, according to Les Echoes, three serious buyers for the French businesses of Aviva, the insurance company that has successfully resisted all efforts to make it perform. The shares have twitched up this week on the hope that this time it’s different.

Well, maybe. The serious buyers will, we hope, have done their homework on a young man called Max-Hervé George. If they have not, they might like to look at Dan McCrum’s interview in the FT. Mr George, you see, has the ability to trade today on yesterday’s prices, thus allowing him a guaranteed profit.

This is a hangover from a different era, where his father spotted the potential in the Fixed Price Arbitrage Life Insurance contract offered by a company that was subsequently absorbed into Aviva France. The contract allowed investors to switch from one fund to another at week-old prices.

Running it is a full-time job, since Aviva has made the process as difficult as possible, up to and including law suits, but there seems no limit to the (risk-free) returns his contract could bring him. It is well past the point of negotiating a suitable settlement for his money machine, but better late than never.


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