Tax, pension changes among private market UK budget priorities

A favorable tax regime and easier private markets access for pension funds have been included in an industry wishlist ahead of UK finance minister Rishi Sunak's Autumn Budget and Spending Review, which will be delivered Oct. 27.

The budget includes the UK tax and spending policies for next financial year and will be presented against a multiyear spending review for each government department. Both will be focused on putting the UK's economy back on an even keel as it recovers from the COVID-19 pandemic. The British Venture Capital Association, a UK private markets advocacy group, is among several interest groups that have written to the government with a list of broad proposals to be included in the budget and review.

Among them are plans to unlock a larger share of the UK's defined contribution pension industry, which, with a value of around $3.6 trillion, is the third-largest in the world. In late September, the Productive Finance Working Group—an industry-led panel co-chaired by the Bank of England, the UK's Treasury and financial regulators—made several recommendations that involve the government lifting barriers preventing defined contribution pensions from investing more in illiquid assets.

The hope for the BVCA, and the industry participants it represents, is that the government follows through on this guidance by, for example, changing the rules around fund distribution to allow for a broader class of investor—such as retail investors—access to private equity and other alternative assets. The change would echo recent moves in the US to allow 401(k) retirement plans to deploy money into the asset class.

Taxes are also high on the agenda. The Conservative Party is loath to raise taxes anywhere, especially after only just breaking a core election pledge by implementing one of the biggest personal tax hikes in a generation.

Nevertheless, the government is under pressure to find new sources of income. One possible revenue source could be an increase in capital gains tax to be closer in line with income tax—as recommended by Office of Tax Simplification in May—which would mean more tax on carried interest. This is something that has been pushed for on both sides of the Atlantic.

Other, less detailed, recommendations put out by the BVCA include a look at fund structure reform to make the UK more attractive for private funds; increased funding for state-backed investors, such as British Patient Capital, to support regional investment; and a so-called "private capital unit" to "join the dots" between regulatory, legal and tax policies, and legislation.