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The UK government on Thursday unveiled new concessions to private equity firms over its crackdown on a tax break enjoyed by industry executives, following warnings the reform would damage British competitiveness.

Chancellor Rachel Reeves in April raised the tax rate on carried interest — the share of profits that private equity executives keep when they sell companies — from 28 per cent to 32 per cent.

The government is planning to treat carried interest as income for tax purposes, rather than capital gains, from April next year after Labour pledged in its election manifesto to close the “loophole” involving private equity.

However, the proposed new regime would still treat executives’ profits relatively favourably: fund managers would have carried interest taxed at an effective rate of 34.1 per cent — markedly lower than the 45 per cent additional rate of income tax.

After consulting on the regime, the Treasury said in a document published on Thursday that the government would drop two proposals that would have made it more difficult for executives to qualify for the 34.1 per cent rate.

The government had said that, from April, executives would be required to place a minimum amount of their own cash in their funds under a so-called co-investment proposal.

It had also been planning to introduce a new minimum waiting period for a fund manager to qualify for the 34.1 per cent rate. Managers are currently required to wait about 40 months between the carried interest being awarded and paid out for it to be treated as a capital gain.

However, the government said on Thursday it would drop both proposals.

The government also narrowed proposals which big private equity firms including Blackstone, KKR and EQT had pushed back on because of fears they could make fund managers subject to UK tax long after they had left the country.

The Treasury had said that, from April, non-UK residents would be subject to income tax on carried interest “to the extent that it relates to services performed in the UK”, leading some industry figures to raise concerns that managers who had left Britain a long time ago would be caught by the regime.

On Thursday the government made concessions, including announcing it would treat all private equity services performed in Britain before last October’s Budget as non-UK activities.

It also said individuals will only be considered to be providing UK services if they worked 60 days a year in the country.

Michael Moore, chief executive of the BVCA, a private equity industry trade body, welcomed the government’s announcement, saying it had taken a “pragmatic approach in considering the potential implications of the proposed new carried-interest regime on growth and competitiveness”.

However, Moore warned that the industry was still concerned about the “risks of double taxation” in some areas of the reform and would continue engaging with the government.

Dan Neidle, founder of Tax Policy Associates, a think-tank, said the government announcement represented a “significant climbdown” by ministers, saying the industry’s “highly organised lobbying effort” had “got some big wins”.

“The government has dropped the requirement for ‘co-investment’. In other words, people can continue to invest a nominal amount, receive a massive return, and achieve that discounted tax rate,” he added.

Jennifer Wall, partner at BDO, an accountancy firm, said the new Treasury document “showed that the government had listened” and “understood the industry and its importance”.

Treasury insiders said the changes outlined in the new document were “technical” in nature, and sought to downplay their significance.

Additional reporting by George Parker