Private Equity - Good News for Managers!

HM Revenue & Customs (HMRC) has finally admitted that its interpretation of parts of the income tax legislation in relation to ratchets and sweet equity were wrong, removing a large part of the doubt over the tax treatment for managers on private equity transactions.

Soon after the income tax regime for employees owning shares was changed in 2003, HMRC agreed a memorandum of understanding (MOU) with the British Venture Capital Association (BVCA) setting out safe harbours for private equity transactions, whereby deals complying with the conditions set out in the MOU would not result in an income tax charge for managers in respect of their shares. Although the MOU dealt principally with the tax treatment at the time of acquisition of the shares it did provide some comfort in relation to the tax position on a subsequent exit, especially in relation to ratchets.