Labour under pressure to water down proposed tax raid on private equity

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Senior Labour figures have discussed diluting the party’s planned tax raid on private equity chiefs over worries their pledge to abolish a notorious loophole enjoyed by the sector could deter investment in the UK.

Shadow chancellor Rachel Reeves on Thursday vowed to push ahead with the plan and her spokesperson insisted a Labour government would charge the top 45p rate of income tax on profits that private equity bosses earn on successful deals.

At present, “carried interest” payments received by private equity executives are taxed at the 28 per cent rate of capital gains tax.

But behind the scenes, some colleagues are arguing the party should water down the policy before a first Labour Budget to avoid deterring international investment in the UK, according to people familiar with the matter.

The opposition party is ahead in the opinion polls and a general election is expected later this year.

One proposal that has been discussed inside the Labour party is to only partially close the loophole by taxing the profits somewhere between 28 and 45 per cent, the people said.

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“We want them to pay more than 28p but there’s a genuine fear that 45p would be too high and could deter international investment,” said one senior party figure.

The precise level is likely to be reviewed after the election, they added.

Over the past year, Labour has courted private equity executives as part of a broader drive to attract investors, including pension plans and sovereign wealth funds, to help finance the shift to green energy.

But some advisers and industry participants have argued that Labour’s tax policy could lead to private equity firms investing less in the UK and shifting their staff abroad.

Reeves first announced plans to equalise the “private equity loophole” in 2021. The carried interest regime has been estimated to benefit about 2,550 people, according to a report by law firm Macfarlanes. 

The shadow chancellor told Labour’s party conference that year that private equity groups were being handed a tax break even “as they asset strip some of our most valued assets”.

Reeves, speaking on Thursday, said: “We will close the private equity loophole where bonuses are not taxed properly.”

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Her comments came as she announced a Labour government would cap corporation tax at its current rate of 25 per cent in a move designed to give certainty to investors and bolster Labour’s pro-business credentials.

Asked on Friday if Labour was still committed to imposing the 45p rate on carried interest, Reeves’ spokesperson said “yes”.

“We’re going to close the tax loophole that allows private equity fund managers to pay capital gains tax on their bonuses, and tax it as income instead,” he said. There were no plans for a review, he added.

Labour has been keen to avoid any more public U-turns after coming under fire from the Tories for “flip-flopping” over policies including the size of its £28bn green prosperity plan.

Another Labour figure said it was possible to “strike the right balance” by finding a compromise between 28p and 45p in the coming months.

One private equity executive said Reeves was seen by the industry as more resistant to pressure on the issue while leader Sir Keir Starmer seemed more receptive to industry pleas.

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Labour has previously estimated that ending the tax break would raise more than £400mn a year for the exchequer. 

Private equity has been attacked for “asset stripping” and tax avoidance by British parliamentarians and union leaders.

Yet the industry has come to play an increasingly influential role in the UK economy in recent years, spending almost £80bn taking public companies private over the past five years.

Among the assets they have acquired include supermarket chains Asda and Wm Morrison, as well as important infrastructure such as airports. 

Macfarlanes has estimated the UK could lose hundreds of millions of pounds of tax revenue if highly paid dealmakers moved to other European countries with more attractive tax regimes. 

Senior executives at some large international private equity groups have said that whether people moved was likely to be determined by how significant the tax increases would be. 

A consultation with a view to increasing the tax rate to less than 45 per cent would be a “nice, constructive place to land”, said one person who works closely with private equity bosses.