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KEY INSIGHTS
Trump's taxes: The White House has deliberately used tax uncertainty – including tariffs and the threat of a "revenge tax" – to encourage deals and leverage economic power, while reducing business taxes at home.
UK emphasises stability: While the US is changing its tax rules to reshape its economy, the UK has promised business a stable environment to foster investment.
Unpredictability, complexity and frequent change is challenging for dealmakers: US policy shifts could disrupt investment flows, while the UK's changes to personal tax rules add complexity and challenge competitiveness.
A regular briefing for the alternative asset management industry.
Since January's inauguration, the Trump White House has been focused on doing deals, using the US government's unparallelled economic might and political power to strike bargains. And, although not the only tool, tax policy has been at the centre of many of the negotiations: the administration has deliberately created huge tax uncertainty to bring counterparties to the table, offering better treatment – and restoring some measure of certainty – if they play ball.
Tariffs have been centre stage – playing havoc with deal planning and leaving markets guessing about the final impact of increased import taxes on the US economy. But other tax changes – or the prospect of them – have also had a big impact on the private markets.
The so-called "revenge tax" is a case in point. Proposed among a range of other tax measures as part of the "One Big Beautiful Bill" (OBBB) legislative process, the central idea was that, if another country taxed American companies in a way the administration deemed unfair, the US could retaliate. Certain investment returns from the United States to residents of those countries would have faced increased US tax. The revised rates would be set high enough to hurt, and it was clear that the UK and many other European countries were among those who might be targeted. Unsurprisingly, the proposal spooked international investors.
Although experts had concerns about the legality of some aspects of the revenge tax, it did result in a deal: in return for dropping the proposal, corporate groups with US-based parents will be exempt from new international rules that will apply a minimum tax rate of 15% to large multinationals. These rules – known as "Pillar 2", and emanating from the OECD – are designed to avoid companies shifting profits to low tax countries. They were supported by the Biden administration and have already been implemented in many jurisdictions. They create compliance headaches for global firms, and the compromise with the US now throws some important aspects of the regime back up in the air. Although the US exemption has been agreed in principle, most of the detail still needs to be worked out. So, while dropping the revenge tax meant that one destabilising measure would not be taken forward, it added uncertainty elsewhere.
"There is no doubt about the administration's intention: it wants to encourage onshore business activity, and will use whatever tools and leverage it has to achieve that."
The OBBB also tackled the Biden-era clean and renewable energy tax incentive framework. As expected, this was scaled back, with as yet uncertain impacts on the amount of investment that will continue to be available to fund the green transition.
But while these changes will cost some businesses more, the overall theme of the OBBB – passed into law on 4 July – was business tax cuts. For instance, the Act made permanent certain taxpayer-friendly provisions included in Trump's first term tax legislation. There was also an emphasis on supporting US-based manufacturing – for example, by allowing full expensing for eligible business property acquired after 19 January 2029, and "qualified production property" where construction begins after 10 January 2025 and before 1 January 2029, and for domestic research and development costs.
There is no doubt about the administration's intention: it wants to encourage onshore business activity, and will use whatever tools and leverage it has to achieve that.
The OBBB also ended one uncertainty – at least, for now – over carried interest tax. President Trump had said earlier in the year that he wanted to tax carried interest at higher rates, but no such changes made it to the final version. In fact, the final version of the law expanded a pre-existing tax break for founders and other investors in "qualified small business stock", following a campaign by industry groups.
If the current US administration's approach to tax has been to deliberately create a measure of uncertainty, the UK's approach has been quite the opposite. Sensitive to criticism that frequent changes to the tax rules have historically discouraged investment in the UK, the current British government has sought to provide a stable business tax environment.
Making good on a pledge in last year's election manifesto, the government published a corporate tax roadmap in October. That provides comfort that there will be no significant business tax changes, unless well signposted in advance, for the next four years or so (until after the next election) – specifically confirming that there will be no increase in corporation tax rates and that the system of permanent full expensing for qualifying plant and machinery investments will be maintained. This is part of the government's drive to encourage investment in the UK – and there has been some hope that US policies might re-focus investors on opportunities in Europe. Whether that turns out to be the case – and, indeed, whether a cash-strapped UK government can keep its promise on business taxes – remains to be seen.
In fact, the UK government is also taking risks with its own personal tax policies. As we noted in the last edition of Alternative Insights, recent changes to the taxation of carried interest and to so-called "non-doms" will make the UK a less attractive home for private capital. As well as leaving the UK with the highest headline carried interest tax rate (around 34.1%) among mainstream European jurisdictions, the new rules are generating uncertainty – they are not yet finalised (although very nearly), include some fundamental changes, and create complexities for internationally mobile executives and their firms. The government and tax authority are working hard to iron out the wrinkles, but the blow to UK competitiveness will not help the government's growth mission.
Private capital firms thrive on complexity and change, but uncertainty can also interrupt investment flows and disrupt exit markets. Many will hope that normal service can be resumed shortly – on both sides of the Atlantic.
We are grateful to Sonita Bennitt, Partner at Seward & Kissel LLP, for her help in the preparation of this edition of Alternative Insights.
Click here to read our summary of the UK carried interest tax changes, following publication of the draft legislation in July.
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