The UK government has rejected a proposed change in capital gains tax rates that would have taken a bigger chunk of private equity profits.

The decision was a response to a review of the capital gains tax system—commissioned by the UK's finance ministry in July 2020—that recommended the government closely align the capital gains tax with income tax, among other things.

"This is a real boon for the private equity industry," said Kevin Cummings, the UK head of corporate tax at law firm McDermott Will & Emery, praising the government's decision. "There's been widespread paranoia that carried interest would lose its preferential treatment and be taxed instead as ordinary pay at rates of up to 47%."

Under the current system, any carried interest earned by a private equity firm from an asset held more than 40 months is taxed as capital gains. This can be as much as 20% at a higher rate, or 28% on real estate assets. Under the changes proposed, however, the rate could have been much higher.

In a letter to the Office of Tax Simplification, the independent body that completed the review, Lucy Frazer, a secretary to the UK Treasury, said: "These reforms would involve a number of wider policy trade-offs and so careful thought must be given to the impact that they would have on taxpayers, as well as any additional administrative burden on [the tax department]."

While concerns of a tax regime change have been allayed in the UK for now, tax on private equity profits remains an issue for politicians on both sides of the Atlantic. The UK's opposition Labour Party has previously suggested it would target private equity earnings should it get into power. Meanwhile, in September, US Democratic lawmakers floated a proposal to increase tax rates on carried-interest profits but also extend the length of time PE investors must hold an asset to benefit from a more favorable rate.

Featured image by Peter Dazeley/Getty Images

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