Policy Publications
‘Carried interest’ (or ‘carry’) is one of the main forms of pay in the private equity industry. Unlike earnings, which are taxed at a top marginal rate of 47%, carried interest is currently taxed as a capital gain at the rate of 28%. The tax treatment of carried interest is highly controversial. Following the 2024 General Election, the Government reiterated its intention to ‘close the carried interest loophole’ by taxing carry like other performance-related rewards. However, it has come under significant pressure to scale back these plans following claims by industry insiders that increasing taxes on private equity executives could lead to a mass exodus of individuals and investment from the UK. Despite extensive public interest in this debate, there is virtually no statistical evidence in the public domain about how much carried interest private equity executives actually receive, how often they receive it, their demographic characteristics, how much (if any) of their own capital they put at risk in their funds, and so on. Although some high-level statistics have been released by HMRC via responses to Freedom of Information (FOI) requests, the Government does not currently publish any official statistics on carried interest or the private equity industry, and (until now) there have been no independent studies on this topic.
Arun Advani, Sebastian Gazmuri-Barker, Sanaya Mahajan, Cesar Poux and Andy Summers (2024)
‘Carried interest’ (or ‘carry’) is one of the main forms of pay in the private equity (PE) industry. Only around 0.01% of the UK population (6,440 individuals) reported any carried interest between 2017 and 2023, but over that period their total carry exceeded £22 billion. Carried interest is extremely concentrated amongst top executives. In 2020, the top 100 executives received an average of £15 million in carry each and paid an average effective tax rate of 29% on their total income and gains (including gains on co-investments taxed at 20%). Carried interest is currently taxed as a capital gain at a rate of 28%. In June 2024, the FT quoted the then Shadow Chancellor Rachel Reeves as saying: ‘“I don’t think it is right that … what is essentially a bonus is taxed at a lower rate than employment income, when you’re not putting your own capital at risk”. Since entering government, Labour has reiterated its Manifesto pledge to “take action in respect of the ‘carried interest’ loophole” by taxing carried interest like other ‘performance-related rewards’ and has said it will announce reforms in the upcoming Autumn Budget.
Media coverage: Financial Times
Arun Advani, Franziska Disslbacher, James Forrester, and Andy Summers (2024)
Inheritance Tax (IHT) applies at a flat rate of 40% to estates worth over £325,000. This 40% rate has extremely high salience with the public and may be one of the reasons why IHT is regularly cited as the UK’s most unpopular tax. And yet, most estates do not actually pay 40% tax, or anywhere close to this. The explanation lies in the proliferation of allowances, exemptions and reliefs for IHT (referred to as ‘reliefs’ for short), which mean that the statutory tax rate is not a good guide to the effective tax rates that estates actually pay. In this report, we use de-identified tax data covering all estates filing for IHT between 2018-2020 to shed new light on IHT reliefs and their role in driving differences in effective tax rates across estates. We also evaluate whether these apparent inequities can be justified in light of other policy objectives. Finally, we discuss options for reforming IHT reliefs and provide evidence on the revenues that could be raised.
Arun Advani, Andrew Lonsdale and Andy Summers (2024)
CenTax Policy Report
Few UK policies have faced as turbulent a history over recent decades as Capital Gains Tax (CGT). The current CGT regime is the product of a series of contradictory reforms that have rendered the rules needlessly complex, inefficient, and unfair. Laying out a roadmap for much-need change, this report recommends a comprehensive package of CGT reforms going beyond changes to the tax rate. We use de-identified tax data accessed via His Majesty’s Revenue and Customs (HMRC) to provide estimates of the revenue and distributional impacts of these recommendations. Importantly, our policy proposals include changes to the tax base that will shut down opportunities for tax avoidance and improve investment incentives and growth. We emphasise that these measures are essential alongside any increases in the tax rate in order for CGT reform to be effective.
Arun Advani, Helen Hughson, Johnathan Inkley, Andrew Lonsdale and Andy Summers (2024)
CenTax Policy Brief
Capital gains are currently taxed at much lower rates than income. This encourages individuals to work in a form that allows them to be paid in capital gains. While many small companies are highly productive, these personal service companies are typically not designed to ever grow. A negative side effect of low CGT rates is the proliferation of these businesses, which not only reduce the overall tax take, but hamper productivity by having people working in ways that are less efficient but are individually optimal because of the tax saving. We present new quantitative evidence that a large share of capital gains in the UK are, in fact, the returns to labour rather than capital. First, using a reform which aimed to make it harder to regularly pay out income as capital gains, we show at the individual level a large spike in company liquidations, as individuals attempted to benefit from CGT treatment one final time before the new rules were in place. Second, using de-identified administrative microdata from HMRC, we show at a macro level that over half of gains come from private business assets with annualised returns over 100%, suggestive that for many this money is not actually the return to capital, but to labour.
Arun Advani, Cesar Poux and Andy Summers (2024)
CenTax Policy Brief
The UK is unusual amongst international peers in not levying any tax on people who leave the country after making substantial capital gains whilst living here. We provide the first quantitative evidence on UK nationals who leave the UK after building a UK business, studying where they went and how much CGT revenue is potentially lost. We recommend that the UK should follow the approach of Australia and Canada by levying a ‘deemed disposal on departure’ (DDD) for people who leave the UK, accompanied by ‘rebasing on arrival’ (ROA) for people arriving in the UK.
Stuart Adam, Arun Advani, Helen Miller and Andy Summers (2024)
IFS Green Budget 2024 – Chapter 7
Removing the harmful distortions created by the poor design of the UK’s CGT should be a key focus of policy. This chapter sets out how the tax base could be reformed to greatly reduce – and in some cases largely remove – the distortions to saving, investment and risk-taking. With a reformed tax base, tax rates could be increased with much less distortion to choices over whether, when or how to invest. We summarise a ‘big-picture solution’ that involves reforming the tax base while aligning overall marginal tax rates across all forms of gains and income. We also discuss steps that could be taken towards this end goal and who would win and lose from reforms.
Who would be affected by Capital Gains Tax reform?
This briefing presents new research on the distribution of capital gains and characteristics of taxpayers who receive them. It contributes to the debate on Capital Gain Tax (CGT) reform by outlining who would be most affected by changes to this tax. We investigate this question using de-identified, confidential data accessed via HMRC, which provides information on all individuals with taxable capital gains from 1997 to 2020. We show that only 3% of adults paid CGT over the decade up to 2020. Most gains go to high income individuals, with almost half going to individuals earning above £150,000. More than half of all gains go to just 5000 people – 0.01% of the population – who receive £6.8m each on average. Gains are also geographically concentrated, with more gains in Kensington than all of Wales, and more gains in Hampstead than the entire North East. Notting Hill West – a neighbourhood of 6,400 people – received more in gains over a five year period than Liverpool, Manchester and Newcastle combined
Reforming Inheritance Tax
Arun Advani and David Sturrock (2023)
IFS Green Budget 2023 – Chapter 7
The IFS Green Budget Chapter looks at the effects of inheritance tax reforms on tax revenue and distributional outcomes. We begin by setting out the status quo position for inheritance tax, and the likely trends in the absence of reform. We highlight a number of problems with the current form of inheritance tax, and make recommendations for reform. We then provide static costings for these reforms, as well as for increasing or decreasing the scope of the tax. This includes the possibility of abolition. Finally we study who would benefit from these reforms, by wealth level of the person leaving the inheritance, by region of the country, and for recipients by wealth level of their parent.
Media coverage:
Op-ed in the New Statesman.
How is evidence used in tax policy making?
Thomas Pope, Gemma Tetlow and Arun Advani (August 2023)
Institute for Government
A key tenet of good policy making is use of the best available evidence. Tax is an important policy area, and one where a wealth of evidence – quantitative and qualitative analysis, and broader intelligence and insights – is generated by researchers, practitioners and officials. This report documents how different types of evidence feed into tax policy making. By highlighting the role evidence plays, and which types of evidence have an impact at different stages of the process, we aim to help external stakeholders to understand how the evidence they produce is used and how they could better feed into policy making. We also provide recommendations for how government can further shift its approach, already improved in recent years, to enhance the quality of the evidence base and to use this more effectively.
Wealth tax: the debate continues
Arun Advani, Emma Chamberlain and Andy Summers (2023)
This letter responds to an article in an earlier issue: “A lively article in this journal asks the question ‘Is now a sensible time to introduce a wealth tax in the UK?‘ (D Hanna, Tax Journal, 7 June 2023). Its subtitle contains the answer ‘Not if Norway is any guide.’ The search for international examples is a natural one, but it is also fraught with danger unless we try to understand the overall policy context.”
Non-doms: basics and case for reform
Arun Advani, David Burgherr and Andy Summers (2022)
This short note summarises some key facts about non-doms, and explains the case for reform to the current regime. It first explains briefly what it means to be a non-dom, the tax advantages this can bring, the costs associated with use of these tax benefits, and past reforms to the regime. It then provides some key statistics on non-doms in the UK. Finally, we explain why the regime is in need of reform.
Reforming the non-dom regime: revenue estimates
Arun Advani, David Burgherr and Andy Summers (2022)
CAGE Policy Briefing 38
This CAGE Policy Briefing studies the offshore income and capital gains of the UK’s ‘non-doms’ – individuals who are resident in the UK but who claim on their tax return that their permanent home (‘domicile’) is abroad. We use de-identified confidential data accessed via HMRC to analyse all individuals who have claimed non-dom status between 1997 and 2018. We show non-doms at least £10.9 billion in offshore income and gains. Most of these unreported income and gains (55%) belong to non-doms who arrived in the UK in the past five years. Looking at previous reforms that restricted access to the non-dom regime, we see these led to very little emigration. Those who did leave were paying hardly any tax. Consequently, abolishing the non-dom regime would raise at least £3.2 billion even after accounting for migration and other tax planning, and the loss of existing revenue from the remittance basis charge.
Media coverage:
The UK’s ‘non-doms’: Who are they, what do they do, and where do they live?
Arun Advani, David Burgherr, Mike Savage and Andy Summers (2022)
CAGE Policy Briefing 36
This CAGE Policy Briefing studies the UK’s ‘non-doms’ – individuals who are resident in the UK but who claim on their tax return that their permanent home (‘domicile’) is abroad. We use de-identified confidential data accessed via HMRC to analyse all individuals who have claimed non-dom status between 1997 and 2018. We show non-doms are globally connected and economically elite: almost all were either born abroad or have lived abroad for substantial periods, and their incomes are very high. Non-doms are highly likely to work in finance and other ‘City’ jobs. They tend to come from Western Europe, India and the US. Within the UK they largely reside in and around London, although there are sizeable shares in Oxford and Cambridge, working in research and education, and in Aberdeen, working in oil.
Who are the super-rich? The wealth and connections of the Sunday Times Rich List
Arun Advani, Andy Summers and Hannah Tarrant (2022)
CAGE Policy Briefing 37
This CAGE Policy Briefing studies the individuals who make up the UK’s Sunday Times Rich List (STRL). These are the 1000 richest people or families with strong ties to the UK. We link together information in the STRL with multiple other data sources to analyse the foreign connections of STRL members, the industries with which they are associated, and their corporate ties to UK land and property. One in seven appear not to be UK resident for tax purposes. Among billionaires, one in seven are located in tax havens. Collectively they own almost £2 trillion in UK wealth.
Fixing the gaps in National Insurance: A better way to fund social care
Arun Advani, Helen Hughson, Andy Summers and Hannah Tarrant (2021)
CAGE Policy Briefing 33
This CAGE Policy Briefing studies alternatives to the government’s new Health and Social Care Levy. Using publicly accessible tax data from HMRC, we find that removing the current National Insurance exemptions for investment income and people of pension age would raise £12 billion. This is the same amount of revenue as the Government is targeting from its new Levy. Equalising National Insurance on higher earnings with the rates already paid by lower earners could raise an additional £20 billion. This would be enough to fund a cut in the main rate of NICs by 1.25p, instead of raising these rates, as the government is planning. Under this alternative package of reforms, more of the revenue would come from London and the South East, and from older, wealthier individuals.
A wealth tax for the UK
Arun Advani, Emma Chamberlain and Andy Summers (2020)
Final Report of the Wealth Tax Commission
This report presents the final findings of the Wealth Tax Commission into whether the UK should have a wealth tax. It concludes that if the government chooses to raise taxes in response to COVID, it should implement a one-off wealth tax in preference to increasing taxes on work or consumption.
Capital Gains and UK Inequality: New evidence from tax microdata
Arun Advani and Andy Summers (2020)
CAGE Policy Briefing 19
This briefing summarises new research on the impact of capital gains – which are excluded from existing income statistics – on measured inequality in the UK
Who gains? The importance of accounting for capital gains
Adam Corlett, Arun Advani & Andy Summers
Resolution Foundation May 2020
Household income statistics are a crucial lens for understanding UK living standards and inequalities. But what counts as ‘income’ is not always clear-cut. Capital gains (the profits from disposing of an asset for more than it was worth when you acquired it) are not included in existing UK income statistics.
This exclusion – part of a broader exclusion of irregular receipts – has led to some important trends being missed. In this report we set out what we know about taxable capital gains over recent years; share ground-breaking research that shows the effects of including capital gains in top income measures; and discuss whether and how the UK’s income statistics could be improved To account for a broader range of income.
Be the first to hear . . .
The Centre for the Analysis of Taxation (CenTax) is dedicated to improving public understanding of tax policy and helping to design better a better tax system, by generating evidence that is rigorous and relevant to policymakers and the public. CenTax is led by Dr Arun Advani (Warwick) and Dr Andy Summers (LSE). CenTax is supported by core funding from the abrdn Financial Fairness Trust and Thirty Percy Foundation