HMRC’s tax turnabout: Another win for private equity under the new Labour government

The UK remains a global leader in private equity, which entered 2025 with strong expectations and generally favourable market conditions. According to KPMG’s annual study, deal activity generated a total value of £158.9 billion in 2024, an almost 12% increase since 2023. 

There were a number of driving factors behind this shift. Decreasing interest rates and inflation for one, UK elections bringing greater (and much needed) political certainty, and a transactional boom ahead of anticipated changes to Capital Gains Tax (CGT).

Many of Europe’s top PE firms are also based in London – the Big Smoke. So, it’s not entirely unforeseen for UK tax authority HM Revenue & Customs (HMRC) to have backed down this week from its previously sudden – and controversial – crackdown on PE firms. 

It’s another win for the industry. 

What’s happened?

Last year, HMRC introduced unexpected amendments to the tax framework governing LLP members, a structure prevalent among private equity firms and professional services. These changes focused on “condition C” of the tax regulations, which meant that LLP members needed to contribute capital equal to at least 25% of profit share to preserve self-employed status. Under HMRC’s guidance for 2024, it was suggested that making large capital contributions to meet this threshold could be considered tax avoidance.

There were a fair few critics of the government’s abrupt decision – they argued that the amendments were announced without proper consultation, and would create real uncertainty for firms that had previously relied on HMRC’s assurances with regards to capital contributions. Industry bodies - including the British Private Equity & Venture Capital Association (BVCA) and the Chartered Institute of Taxation (CIOT) – were amongst those who strongly opposed. 

This week, in response to the reactions and feedback, this is what we heard in the news from a HMRC spokesperson: “Having conducted a thorough review and listened carefully to industry representatives, we’ve decided that the anti-avoidance rule does not apply where top-ups are genuine, intended to be enduring and give rise to real risk,”

The lobbying worked, this time around – clearly.

What does this mean?

‘Nowhere in the world have private equity firms found a more welcoming playground than in the UK’, the FT claimed last year. And it seems like the government is prepared to maintain this supportive environment, despite the somewhat concerning back and forth.

To that end, abandoning these amendments will provide major relief to PE firms, ensuring that genuine capital contributions from LLP members will not be subject to punitive tax measures. This would also maintain the self-employed status of partners, allowing them to avoid substantial retrospective tax liabilities.

So, it’s a victory for PE firms who have managed to dodge a bullet and can breathe a sigh of relief for now. However, this uncertainty over tax policy does raise reasonable questions with regards to the potential impact on investor confidence in the long term, alongside other ripple effects. If firms become apprehensive about unpredictable tax rulings, could it lead to a decline in the UK’s investment appeal? Given the government’s quick shift this time, might there be another sudden policy reversal later down the line?

Investors will be watching closely.