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Shadow chancellor Rachel Reeves has indicated that Labor will continue the UK’s preferential tax treatment of private equity managers in cases where fund managers put their own capital at risk.
Labor has pledged to raise £565m a year by closing a “loophole” which allows private equity managers to have part of their earnings, known as carried interest, taxed as capital gains rather than income, which attracts a much higher rate of tax. .
Reeves told the Financial Times that private equity fund managers should pay income tax on the money they make from successful deals if they have not invested their own capital.
“I don’t think it’s right. . . what is essentially a bonus is taxed at a lower rate than employment income unless you are putting your equity at risk,” she said.
But she added: “If you are putting your own capital at risk, it is appropriate that you pay capital gains tax.”
Asked if she expected most interest in the UK to be taxed as income under this broad approach, Reeves said: “Yes”.
Reeves said UK private equity chiefs had only invested “small” amounts of equity at the moment, adding that the sums were “lower than many other countries require” to qualify for preferential tax treatment.
Many private equity managers co-invest in their funds, contributing 1 percent of the seed capital. France and Italy usually allow reduced tax rates on carried interest if fund managers invest this amount.
Labour’s promised crackdown on private equity managers is one of a relatively narrow set of tax increases the opposition party has committed to if it wins the UK general election on July 4, as currently expected.
Reeves said the costs in Labour’s manifesto, which said the measure would bring in £565m a year by 2028-29, were “an estimate of how much we would like to raise and what we would do with that money”.
She said Labor would consult on the changes if elected.
Private equity managers are paid in part through carried interest, meaning they receive a portion of the investment profits generated by their funds if they achieve returns above a certain level.
In the UK it is taxed as a capital gain at a rate of 28 per cent rather than as income which attracts a top rate of 45 per cent plus National Insurance.
Preferential tax treatment of carried interest in many countries has allowed private equity managers to avoid income taxes on incentive fees exceeding $1 trillion since 2000, according to Oxford University research.
Reeves said the £565m annual tax figure Labor planned to raise through its policy was based on research published by the Resolution Foundation in 2020 which estimated the revenue from taxing carried interest as income.
The think-tank did not consider any behavioral impact of such a change, such as fund managers leaving the UK as a result.
A similar calculation based on £5bn of carried interest earned by 3,000 people in the UK in the 2022 tax year would mean a windfall of almost £1bn to the Treasury before allowing emigration.
Some advisers to private equity firms have said that treating accrued interest as income where no capital is at risk seems fair. “I don’t see how you can intellectually object to Labour’s position,” said one. “No one wants to pay higher taxes, but you have to accept that eventually it has to go.”
But some in the industry are preparing to push for the proposals to be watered down in any Labour-led consultation if it wins power.
One industry person said they believed Labor still had a “level of open-mindedness in the details” of the proposals.