Guy Hands, one of Britain’s best-known investors, has said he regrets quitting the UK to become a tax exile as he warned others not to follow his example if Labour raises taxes on private equity.
The private equity dealmaker, who left the UK more than a decade ago to move to low-tax Guernsey, said he now “deeply regrets” the move because it was a “disaster” for his business.
Mr Hands warned that a possible tax raid on the private equity industry proposed by Labour could prompt an exodus of investors from the UK. However, he cautioned others against following suit by moving offshore.
Writing in The Telegraph, he said: “Moving to Guernsey greatly impacted my ability to build and maintain strong relationships with contacts, on which my success in business relied. I lost the flow of the market.
“For me it was a disaster.”
Mr Hands is one of Britain’s most prominent investors, having put billions into everything from record labels to care homes during his lengthy, and at times controversial, career.
He pioneered many of the tactics used by the private equity industry in the early 2000s through his business, Terra Firma, having spun it out from Japanese bank Nomura.
A multi-millionaire with an estimated net worth of more than £200m, he moved from Kent to Guernsey in 2009 ahead of mooted tax changes targeting wealthy investors. Guernsey, which has a population of around 64,000, has a flat income tax rate of 20pc and no capital gains or dividend taxes.
Mr Hands warned that plans by Labour to close a private equity tax loophole could prompt other investors to decamp abroad, lured by more favourable regimes in rival financial hubs like Paris and Amsterdam.
Labour have pledged to change the rate of taxation on so-called carried interest, which forms a crucial part of a private equity executives’ pay packages.
Carried interest is taxed at the lower capital gains rate, instead of the income tax rate. Labour wants to close this loophole and tax carried interest at the same rate as income.
Mr Hands argued that doing so would harm public finances because private equity barons would abandon Britain.
He said: “Governments must have a good understanding of the message they want to send to the business community and stick to it if they want to encourage growth.”
Mr Hands, 64, stepped down as chief executive of Terra Firma earlier this year after more than two decades running the company.
He is best known for his £4.2bn investment in record label EMI, which soured in the midst of the financial crisis. The label’s subsequent collapse prompted a court battle with Citi. Mr Hands later abandoned his case against the US investment bank, who had advised on the deal.
Investments in care home provider Four Seasons and military home supplier Annington have also prompted headaches for Mr Hands over the years.
Annington has been locked in a long-running legal battle with the Government over the privatisation of military housing, with the High Court ruling earlier this year that the Ministry of Defence could retake control of homes worth £8bn because the sale was a “bad deal”. Annington, which is ultimately controlled by Mr Hands, plans to appeal.
More recently, Mr Hands and his wife, Julia, who together are worth around £250m, established a boutique hotel chain. The pair also own the largest McDonald’s franchise in the Nordic region.
Mr Hands is not the first businessman to move to a lower tax nation. Sir Jim Ratcliffe left the UK for tax-free Monaco three years ago.
I hope the private equity industry doesn’t follow my mistake and leave the UK
By Guy Hands
As we approach the next election, the likelihood of a Labour Party victory continues to grow. With this comes ever-increasing numbers of people in the private equity world considering leaving the UK in anticipation of higher taxes.
As someone who left the UK very publicly 14 years ago, I would urge anyone following my lead to think again. Because it’s a decision I deeply regret.
As I wrote in my recent article in The Telegraph about identity politics and the environment, siloed thinking is very dangerous … and that’s exactly what I was guilty of when I made my decision in 2009.
I left not because of the tax rate but because of the uncertainty around future tax changes. The Inland Revenue was aggressively exploring whether it would tax my investors’ profits and the revenues they provided to the offshore holding company, on top of my own individual and corporate tax responsibilities.
In the end, it decided that investors in UK private equity funds should pay tax in their own country, with neither me nor the fund responsible for such profits or the revenues produced.
However, by then, I had already left, along with a number of others from the private equity and hedge fund communities. Uncertainty is one of the most unattractive things that a government can offer businesses, which is exactly the pattern that any prospective UK government needs to avoid.
Moving to Guernsey greatly impacted my ability to build and maintain strong relationships with contacts, on which my success in business relied. I lost the flow of the market and ultimately I was never able to raise a blind fund again. Dealmaking and fundraising is best done face to face and that was certainly the case even in those pre-Zoom days.
I also lost connection with my team in London, relying on fractured phone calls and occasional in-person meetings which did not make up for the day-to-day touchpoints that are required when you run a business.
So, for me it was a disaster. It was also not good for the UK. At the time when I left, Terra Firma was the ninth-biggest private equity firm in the world, contributing around 30pc of our funds under management to the local economy through direct employment and our local ecosystem of consultants and advisers. All of this wider activity was taxed on average at around 50pc if you include national insurance.
In 2009, it was just me and a few others who left the UK from Terra Firma. However, we are now in a situation where whole teams at private equity firms are looking at relocating abroad, which of course will have an even greater financial impact on the UK.
Whatever one’s views are on the private equity industry, it is hard to argue that it’s not hugely important for the UK economy. Indeed, according to a study this year from EY and the British Private Equity & Venture Capital Association, private equity and venture capital-backed businesses are estimated to directly generate £137bn of GDP in 2023, equivalent to 6pc of the UK’s GDP.
This is without taking into account the financial contribution of the suppliers and wider ecosystem that service the industry: lawyers, accountants and consultants. These businesses depend on the UK, and in particular London, maintaining its position as a leading hub for private equity in Europe.
Private equity firms can relocate extremely quickly. Although by some miracle the UK has largely retained the industry post-Brexit, cities such as Paris, Amsterdam, Milan and Frankfurt are actively vying to tempt people away from London, with favourable tax regimes. Once a centre starts to lose grip, the unwinding quickly becomes a vicious cycle. Most dangerous of all is the risk that large parts of the associated business and advisory community would follow the industry and its deal flow out of the UK.
The talk of the Labour Party’s plans to reform tax on private equity, while undeniably satisfying for some, risks losing far more than just high-paid private equity executives and would likely lead to an overall reduction rather than an increase in tax revenue.
Although private equity gets a lot of bad press, and increasing tax on it might win some votes, the industry and its advisers do pay a lot of tax, are a significant driver for the UK economy and can easily leave. On the other hand, if tax goes up, while private equity executives may see themselves better off elsewhere on paper, they risk becoming estranged from their business ecosystem.
Governments must have a good understanding of the message they want to send to the business community and stick to it if they want to encourage growth.
For tax, this means clear rules that are changed as little as possible. Chancellors and shadow chancellors should consider this carefully when thinking about their approach to future taxation in all areas and not just private equity.